Money received from the government typically has strings attached, and these strings usually come in the form of additional taxes or restrictions on your life. You can qualify for programs like Medicaid, for example, but only if your income remains under limits the government sets.
And you can qualify for subsidies that make healthcare more affordable through the Affordable Care Act (ACA), but if you accidentally earn too much money (more than 400% of the Federal Poverty Limit, or FPL) then those subsidies have to be paid back and you’re on the hook for the full brunt of your healthcare costs.
Coronavirus stimulus plans come with a few of their own “gotchas” as well, although the catch that comes with receiving government money should be obvious this time.
For starters, let’s talk about the extra $600 many Americans are receiving on top of their unemployment benefits. This $600 weekly boost for unemployed workers comes courtesy of the Federal Pandemic Unemployment Compensation program that was put in place as part of the CARES Act.
Unemployed workers who accept these funds shouldn’t be surprised this money is considered taxable income. After all, unemployment benefits have never been tax-free.
Generally, consumers have two options when it comes to paying taxes on unemployment income. They can pay quarterly estimated taxes (or simply pay it when taxes are due) or they can have income taxes withheld. You can fill out a Form W-4V with the Internal Revenue Service (IRS) if you want to have your state government withhold part of your pay to use toward federal and state income taxes. Paying estimated quarterly taxes is more complex, but you do have the option to do it online.
With many states rolling out the additional $600 in weekly unemployment benefits starting in mid-April, and with this benefit primed to last until July 31, 2020, the potential for more taxes than some people realize should be obvious.
The extra $600 in weekly payments works out to $8,400 in taxable income if you received the benefit for 14 weeks, and remember, this money is offered on top of traditional unemployment benefits offered through states. And many aren’t having any of it subject to withholding – meaning taxes will come due.
Stimulus Checks Are Not Taxable
Now, here’s some good news. The $1,200 stimulus checks are not taxable, and neither are the checks for $500 eligible parents received for each child. These stimulus checks are not a loan you’re expected to pay back, nor are they some sort of advance on your regular tax refund for next year.
While this money is considered a 2020 tax credit for next year’s tax season, it won’t reduce the amount of your refund due next year.
So, don’t confuse your extra $600 per week in unemployment with your $1,200 stimulus check.
If you expect to receive the average tax refund, which worked out to $2,869 last year according to Bankrate, then you will still receive the amount you are due regardless of whether you qualified for a stimulus check or not.
But, here’s where things get interesting. Because the stimulus checks themselves were advanced tax credits for 2020 based on your 2018 or 2019 income tax return, it’s possible you could qualify for the credit when you file your 2020 taxes in 2021. This could happen if you made too much money to qualify using your 2018 or 2019 tax return but your income goes down to eligible levels in 2020.
According to the Internal Revenue Service (IRS), single filers with adjusted gross incomes up to $75,000 qualified for a full stimulus check, as did head of household filers who earned up to $112,500 and married couples filing jointly with incomes up to $150,000. That amount is in addition to the $500 extra received per qualifying child. Note that stimulus checks began phasing out for Americans at these income levels, and that partial stimulus checks were offered for those with incomes up to $198,000 for tax filers with a joint return, $136,500 for head of household, and $99 for single filers.
Plan For Taxes Now, Not Later
Just like the Tax Cuts and Jobs Act of 2017 (TCJA) created some winners and losers in terms of taxes, coronavirus stimulus plans will likely do the same.
It’s very possible that many who accepted additional unemployment benefits without withholding money for taxes will be surprised when they owe more on taxes than they realized, and I’m sure they’ll blame the government – or confuse it with it the stimulus check being an advance on their now missing tax refund or similar.
Likewise, some people whose incomes drop dramatically from 2019 to 2020 will probably think they won the lottery when, suddenly, they qualify for a coronavirus stimulus check when they file their taxes in 2021.
If you believe you may be hit with an unusually high tax bill next year for any reason, there are some steps you can take now.
Like I mentioned already, you can fill out a Form W-4V and send it to the payer to have money withheld for taxes from your unemployment benefits. If you’re receiving unemployment benefits now but you plan to be fully employed later this year, you can also ask your employer about increasing your withholding in order to set aside more funds to pay your tax bill next year.
The IRS also introduced a new withholding calculator that can help taxpayers avoid a nasty surprise come next year. The IRS encourages everyone to use this estimator to perform a “paycheck checkup,” as they call it. This basically means you can plan ahead to ensure the right amount of money is withheld from your paycheck each year.
“Checking your withholding can help protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time next year,” writes the IRS. “At the same time, you may prefer to have less tax withheld up front, so you receive more in your paychecks and get a smaller refund at tax time.”
The choice is yours, but you should do some planning if you’re worried about a surprise tax bill. You may owe more next year but you may also owe less. Only you can run the numbers and find out.