When COVID-19 struck, millions of people unfortunately lost their jobs. Some were laid off, and others were furloughed. Many are still facing unemployment, lay offs, or furloughs. You may be wondering, what’s the difference between being laid off or furloughed? When you are laid off, you have been let go, with no promise of being re-hired in the future. But a furlough means you are temporarily laid off, with the intention of coming back to work in the future when conditions change. When you return, you don’t go through the re-hiring process, and you may be eligible to continue employer benefits such as health insurance during the furlough period, depending on your employer’s policies.
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If you were furloughed, you may have received unemployment benefits during that time and may not know if unemployment income is taxable or not. Though the stimulus check you may have received under the CARES Act and the Coronavirus Response and Relief Supplemental Appropriations Act is not taxable, your unemployment benefits are typically taxable income you must report on your 2020 income tax return (the one you file in 2021). However, under the American Rescue Plan that recently passed on March 11, 2021, the first $10,200 of federal unemployment income is tax-free for households with income less than $150,000. This provision would be retroactive to tax year 2020 (the taxes you file in 2021).
When you returned to work after your furlough, you began getting a paycheck again and your unemployment benefits probably ended. And of course, those wages from working are taxable income to you, just as in the past. If you were brought back to work with less hours and were still eligible for unemployment benefits, also keep in mind that you will have both your employment income and unemployment income. Usually both your income from employment and unemployment would be taxable, however under the American Rescue Plan your first $10,200 of federal unemployment income will be tax-free in tax year 2020 if you earn less than $150,000.
So what can you expect when you file your 2020 income tax return? If you have received refunds each year in the past, your refund may be lower for 2020 if you also received other income from working during the year. Here’s why: your tax refund depends on how much you had taken out of your regular paycheck for income tax withholding – if you had more taken out each pay period than the taxes owed, then you get a tax refund when you file your return.
If you received fewer paychecks in 2020 because you were furloughed for part of the year, you had fewer pay periods that withholding was taken out of your check that could result in a smaller refund at tax time.
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In addition, if you didn’t have federal taxes withheld from unemployment you may not have had enough withheld to cover taxes at your tax rate. You can voluntarily request to have up to 10% withheld from unemployment by filling out a Form W-4V Voluntary Withholding Request while you are receiving unemployment compensation.
You may be wondering if you earned less in 2020 as a result of unemployment, won’t your tax rates be lower? That depends on how long you were furloughed and how much other income you had during the year. For 2020 the unemployment tax relief under the American Rescue Plan may help all of this since the first $10,200 of unemployment income may be tax-free if you earn less than $150,000.
Going forward, there are some steps you can take to avoid any surprises at tax-time if you think you didn’t have enough taxes withheld from unemployment while furloughed.
- Adjust your withholding once you are back at work by filling out a new Form W-4 Employee Withholding Certificate.
- Take credits and deductions that you weren’t eligible for before because your income was more than the income threshold like the Earned Income Tax Credit, the Saver’s Credit, or some education tax benefits.
*Note, under the Coronavirus Response and Relief Supplemental Appropriations Act passed on December 27, 2020, there is a special lookback provision which has the potential to help workers who experienced lower income in 2020, or received unemployment income in lieu of their regular wages, to get bigger tax credits and larger refunds in the coming year.
The special lookback rule may allow you to use your earned income from 2019 to help you claim more Earned Income Tax Credit and the additional Child Tax Credit when you file your 2020 taxes, since lower 2020 income could reduce the amount you’re eligible for.
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TurboTax is here for you in these times of need. Check out our TurboTax Unemployment Center where you can get up to date information, tips, and advice to help you better understand current unemployment benefits and the tax implications.