Unexpected Pandemic Taxes
Hello Money Talkers! How is everyone holding up during this Pandemic? I hope you are all doing well. I also hope that you all have a budget you are sticking to, an emergency fund that is tiding you over, and that you are all saving as much as you can and being as productive as possible in these times. The best plan you can possibly have is any plan. With that being said, I have come to the realization that many people are confused or altogether unaware of how their unemployment and stimulus money will affect their taxes. So I just wanted to briefly go over what you should expect.
The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, was a $2.2 trillion economic stimulus bill passed by the 116th U.S. Congress and signed into law by President Donald Trump in March 2020 in response to the economic fallout of the COVID-19 pandemic in the United States. The spending primarily includes $300 billion in one-time cash payments to individual Americans (which we know as the $1200 stimulus checks), $260 billion in increased unemployment benefits (which we know as the additional $600 in unemployment), the creation of the Paycheck Protection Program that provides forgivable loans to small businesses with an initial $350 billion in funding, $500 billion in aid for large corporations, and $339.8 billion to state and local governments.
Basically, what most working class Americans got from the CARES Act was a one time $1200 stimulus check and if they filed for unemployment, the additional $600 in weekly unemployment benefits. So I am going to focus on those two aspects of the CARES Act. While this money has definitely helped, some of it does come at a cost. The cost of this “free money” meant to help us and stimulate the economy is that most of it is taxed, unbeknownst to many.
Let’s begin with unemployment. I will use information based on the state of Florida, since that is the state that I am currently a resident of. In Florida, the maximum unemployment benefit amount you can receive weekly is $275. I don’t know about you all, but $275 a week, as a maximum benefit, is just not enough. I am sooo glad that they passed legislation to add the additional $600 a week. But this money is not taxed; at all. We must pay taxes on the $275 and the additional $600, all of it. In the state of Florida we must pay at least 10% tax on all unemployment benefits received. That’s $87.50 a week. If you received the full 12 weeks benefits allotted to Floridians, that’s a total of $1,050.00.
If you are unaware that you have to pay these taxes, you will be very surprised come tax time. Not only will you not receive the amount you're used to receiving, but you may actually end up owing money to cover the difference. If you don’t have that money when it’s due the IRS will collect one way or another. So I highly suggest having your taxes taken out automatically; that way you don’t even have to worry about it come tax time. The standard weekly $275 you can opt to have taxes taken out through the unemployment online portal. Simply log in, like you normally would to claim your weekly benefits. Once logged in and on the home page click on “View and Maintain Account Information” on the top left side of the page. On the next page click on “Payment Method and Tax Withholding Options”. From that page you will edit your payment and tax withholding options to have taxes automatically taken out before you receive your benefits, and Voila! You have completed this mission. However, requesting taxes be automatically taken out of your additional $600 is a little more complicated.
To have taxes automatically deducted your additional $600 you have to fill out a form and mail it in. To request the withholding, you’ll need to fill out form W-4V (the “V” stands for voluntary). Depending on your state, this may be something you can do online through the benefits portal, but Florida does not have that option… go figure. A flat federal tax rate of 10% of the benefits paid can be withheld from each payment, according to the Labor Department. Once the W-4V form is filled out, you must mail it to your local social security office. Once your request for voluntary withholding has been received and processed in the system you will begin to see taxes deducted automatically from your additional $600 benefits.
If you do not want to go through the trouble of withholding your taxes, you can do it yourself. Set aside 10% of any benefits you receive and allot that money for paying taxes come tax time. If you want to get proactive you’ll likely need to send quarterly estimated tax payments to the IRS to avoid a big tax bill next spring. TurboTax has a W-4 withholding calculator that may be useful in helping you calculate your estimated payment, or you can opt to work with an accountant.
But there is good news! The good news is that the one time $1200 stimulus check that most of us received from the CARES Act is not taxed and will not be taxed. So try to think of that money like grant money. The $1200 is free money given to you, with no strings attached (for once).
Now that we know how the CARES Act benefits that we received will be taxed, you may be wondering about the HEROES Act that is in the process of being signed into law. If, and when, the HEROES Act passes, it will work similar to the CARES Act. Under the HEROES Act, if there is an additional $1200 Stimulus check this money will likely not be taxed either, much like the first check. If there will be an extension to the $600 additional UI benefits, keep in mind that it will be taxable. You must request that the taxes be taken out again. Always keep in mind that any income you receive you will need to pay taxes on.
Sidenote: Although they will likely extend the additional unemployment benefits, it may be less. Some members of congress believe that the additional $600 is too much money and is, therefore, a disincentive for Americans to go back to work. Some congress members are pushing for only 70% of applicants weekly pay instead of the additional $600 so that it is more proportionate to what applicants actually make. But his is all speculation. Only time will tell what the final version of the CARES Act will entail.
Long story short, do not get caught with your tax pants down. Be prepared! Make sure you either opt to have the taxes taken out before you receive the benefits, that you set aside the correct amount of money that you will owe, or that you are proactive and send estimated tax payments ahead of time. Any way you choose to handle it make sure that you are informed and that you have a plan.
I hope that this information has been enlightening and helpful. Till next time Money Talkers!