Between March and April 2020, unemployment soared to 14.8% — a number not seen in America since before WW2, according to the Pew Research Center.
A year into the pandemic, many are still coping with the fallout — emotionally and financially.
If you’re one of the many people still recovering from losing your job last year, you may have been relieved to hear that President Joe Biden’s $1.9 federal relief bill waives $10,200 in unemployment benefits from 2020 tax returns.
So if you lost your job last year and you’re getting ready to file your taxes before the extended May 17 deadline, you may need to prepare yourself for a bigger tax bill.
Unemployment benefits on your state tax return
About 40 million Americans received unemployment benefits in 2020, amounting to more than $580 billion, according to The Century Foundation.
Because of the pandemic, state unemployment offices fielded more than 1 million claims every week for 46 consecutive weeks.
Along with the tax break, Biden’s bill also extended the $300 a week in federal unemployment benefits until September 6.
However, only 13 states are excluding $10,200 of federal unemployment benefits from their residents’ tax liability for 2020. Three others, Arizona, Ohio and Vermont, didn’t officially adopt the federal standard, but their tax forms do allow eligible residents to claim the break, essentially giving them the waiver.
If you live in a state that doesn’t offer the unemployment tax break, you’ll have to add back any benefits you received that were excluded on your federal tax return when you go to file your state taxes.
Which states aren’t offering the break?
The 13 states that are still taxing federal unemployment benefits are: Colorado, Georgia, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, North Carolina, New York, Rhode Island, South Carolina and West Virginia.
Some of those states may still decide to adopt the tax break before the May 17 tax filing deadline.
Colorado, however, will not. In a statement from its Department of Revenue, it confirmed on March 22 that while residents won’t get the tax break, it is considering other options.
How is my state able to opt out of this?
When you think of filing your taxes, you probably first think of federal income taxes. But you actually pay taxes to a number of different levels of government: municipal, state and federal.
Each state has its own tax rate for residents.
How much you’ll end up paying depends on the individual rate in each state. Some states, like Colorado, Kentucky and Massachusetts keep their income tax rates low, between 4.63% and 5%.
But others, like New York, Minnesota and Hawaii range between 8.82% and 11%.
Finally, there are 9 states that don’t charge income tax at all. Tennessee just joined this category as of Jan. 1. The other 8 states are: Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Washington and Wyoming.
Ways to give your budget a break
Even if you’re taking advantage of all the tax breaks out there, you may feel like you’re not getting back enough on your refund year after year.
Many taxpayers miss out of some great tax benefits simply by not spending their income strategically enough. Here are a few options you can enlist to claim more back in the years to come — especially with a potential tax hike coming down the pipe.
Investing: A great way to grow your money and reduce your tax liability is to start investing in stocks. There are plenty of apps out there for beginners, that allow you to do things like invest your spare change.
Retirement planning: You may think planning for retirement exclusively has long-term benefits, but contributing to a retirement account is another excellent way to claw back some of your income from the IRS. Reducing your tax liability to keep more of your money is a winning strategy.
Bring in a pro: Need even more ideas? Why not work with a legit financial advisor to come up with some other strategies to set you up for financial success.
Get help with your other debts: * If your other debts will make it difficult for you to deal with a higher tax bill, you should consider a debt consolidation loan that can allow you to pay off your debts at a lower interest rate and hopefully take some of the pressure off.