Oh the indignity of it all! You lost your job to COVID-19. The good news is Congress stepped up and provided a really great boost in the CARES Act. On top of your regular Unemployment, Uncle Sam added an additional $600 a week from April 5 to July 31.
So Kelly! What’s so wrong with that? Well let me tell you, it’s all about those other pesky IRS “rules” (us tax professionals call them “code sections.”) Per one of those IRS rules, unemployment compensation is taxable.
You say, “What? Unemployment, even with the CARES Act $600 a week kicker, is not even what my old NET paycheck (after taking out taxes) was! You mean, I have to pay taxes on that pittance that was just barely enough to pay my bills and keep me from losing my house during the shutdown?”
Let me put it this way. Nevada did NOT take any Federal Income Taxes out of your “gross” unemployment. Kind of like getting a form 1099 for working as an independent contractor instead of an employee. When it comes time to file your annual Federal Income Tax Return, suddenly, SURPRISE! You owe more tax!
You ask, “How much tax might I owe?” Well, therein lies the problem. Our tax laws are so complicated that the best I can do is say, “It depends.” One of the “It depends” has to do with if you’re married or single. Here’s an example. If you’re married and your total W-2 wages are $50,000 and you received an additional $15,000 in unemployment, then your potential extra tax on that $15,000 unemployment would be about $1,800. BUT, if you are single and have the same scenario, your extra tax on that $15,000 of unemployment would be around $3,300.
To be sure you got that. Married pays $1,800 in tax. Single person pays $3,300 on the same amount of income, including the unemployment. You see, it’s all in those magical tax rate tables. It’s called “progressive” tax. The more you make, the higher the effective tax rate used to calculate your tax. The general rule is that married tax rates are about half of single rates. This is based upon the assumption that two single folks who get married, combine their income, so the threshold for jumping to the next highest tax rate is about double the single rules.
So what should you do if you got unemployment this year? Use the above example as a guide. If you are single, figure about 22% of your unemployment benefits received will be the extra tax you will owe. If you are married, then figure about the same rate… 22%. Actual results will vary because there are many other issues that might increase or decrease your applicable tax rate. Be prepared because there is a double whammy coming your way. Not only do you owe tax on the unemployment, but you went that long without having normal Federal Income Tax withheld from your regular wages. Boom! Smaller refund coming, or you will owe some. Start saving so you can pay this next April.
Did you hear? Romans 13:7a says, “Render therefore to all their due: taxes to whom taxes are due…”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com Also on Facebook.