How to File a Tax Return When You’re Unemployed | My Money

0

If you are unemployed, it may feel like a kick in the teeth, but you still must file a tax return by the April 15 due date.

The steps you need to take to prepare your 2020 return are the same as in previous years. Here’s what to know about filing taxes when unemployed.

Gather Your Tax Documents

The first item of business is to gather your documents to determine your income. That may include these forms:

Form W-2. If you were employed for part of the year, you will have a form W-2 that will show your wages and any federal or state taxes that have been withheld.

Form 1099-G. If you were unemployed for part of the year and received any unemployment benefit, you will also have a form 1099-G, which will be issued by your state’s labor department. This form will show the amount of unemployment payments you have received and the amount of federal tax withheld, if any. The maximum that could have been withheld is 10%.

A little bit of good news for 2020 taxpayers is that if the distribution was related to COVID-19, you are exempt from the 10% early withdrawal penalty, and you will report the amount taken out over the next three tax years, unless you choose not to. If you took out $30,000, you will report only $10,000 for the years 2020, 2021 and 2022. Furthermore, if you are able to replenish the retirement account, the $10,000 will be reduced by the repayment.

Reporting Income If You Worked a Side Hustle

If you worked a side gig and received income, you will have to report that money. You’ll report it as other income or by creating a Schedule C if it was an unincorporated business with the intent of making a profit. The benefit of the Schedule C is that you can deduct expenses associated with the business.

An example of when you’d report earnings as “other income” is if you did something once or twice and got paid, but you were not making a business of it. A copy editor who reviews work for one person and receives $1,000 may put that on line 8 of Schedule 1. If, however, she chooses to become a freelance copy editor, advertises and looks for clients, a Schedule C would be more appropriate.

Unemployed taxpayers need to add in all interest, dividends and the results from buying and selling assets, just as they have in other years. This is your income. There can be adjustments to income such as alimony paid, contributions to an IRA that are deductible, student loan interest and, new for 2020, the $300 charitable contribution for donations made by cash, check or credit card only.

Calculate Taxes Owed

The median income for Americans in 2019 was $68,703, according to U.S. Census data. If you are at the median, a married couple filing jointly with one child, and not itemizing the return, your federal tax liability is $4,400 and will be lowered by the $2,000 child tax credit. If you had absolutely no federal tax withholdings, you will owe about $2,400. If you had any tax withheld, the amount owed could be less or you could be due a refund. You won’t know until you prepare the return.

Pay Your Tax Bill

If you do owe the IRS and are unable to pay the tax by the due date, it is critical that you still file your tax return. If you do not file a return or a request for an extension, you will be assessed a failure-to-file penalty, which can be as much as 25% of the tax due.

If you file an extension, you have until October to file without penalty. If you do not file by the extension, the penalty is assessed back to April. File the return and work with the IRS under one of its payment systems.

Common IRS payment systems are the short-term payment plan, which is for 120 days, and the streamlined installment agreements, which allow the taxpayer 72 months to pay off the debt, including penalties and interest. Streamlined agreements are almost automatic and do not require the taxpayer to submit too much documentation.

The current maximum for the streamlined agreement is $50,000 in taxes and penalties. If you set up the payment online and have direct debit, the user fee is only $31. If you need to do it on the phone with an IRS representative, the fee is higher.

If the amount that you owe the IRS is greater than $50,000, you still can obtain an installment agreement, but you will have to submit more documentation. The IRS will look at your income, assets and expenses and, depending on the amount owed, you may have up to 84 months to make payments.

The important and most efficient thing for most taxpayers is to file the return on time and work out a payment plan. Also, while on a payment plan, the IRS will apply any future tax refunds to the balance owed and that can reduce the debt quickly.

The simple act of filing will save you 25% at a time when money is tight.



Source

Leave A Reply

Your email address will not be published.