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Your Guide To Paying Taxes On California Unemployment Benefits

A sign marks the exterior of an IRS building
The Internal Revenue Service building in Washington, DC.
(Zach Gibson
Getty Images)
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The COVID-19 pandemic has disrupted many parts of our lives. But there's one annual ritual you still can't escape: paying your taxes.

For millions of Californians, this year's tax return will include a less common form of income -- unemployment benefits.

Taxes can be confusing even in the best of times. And only more so if you spent last year in-and-out of work, collecting income from multiple sources, including California's unemployment agency.

We've put some common questions about unemployment benefits to tax experts in Los Angeles. Hopefully these answers will make filing a bit easier after a tough year.

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Wait... I have to pay taxes on my unemployment benefits?

Yes, unemployment benefits are taxable. This can understandably come as a shock to those who find the whole unemployment system confusing. But unemployment checks are considered income, and you'll have to report that money when you file.

But there's good news if you live in California. Of all the states that levy a state income tax, only a handful exclude unemployment benefits, and California is one of them. However, federal income tax still applies.

How much you owe will depend on how much income you collected last year -- from unemployment, W2 employment, freelancing, investments, etc. -- and what tax bracket you fall under based on that income.

Depending on how much unemployment you received in 2020, and how much money you earned overall, tax professionals say you could be in for an unpleasant surprise.

Do I have any withholdings?

You might. California's Employment Development Department (EDD) -- the agency that administers unemployment benefits -- gives recipients the option to withhold money from their biweekly payments.

But withholding is not mandatory. You needed to actively click the withholding box when certifying each week. You can find the amount you withheld during 2020 in Box 4 on the 1099-G tax form you should've received from EDD. If you didn't withhold anything, you'll have to pay any taxes owed out of pocket.

Keep in mind, EDD's withholding option did not cover all benefits in 2020. It only withheld 10% from state unemployment benefits. It didn't touch the enhanced federal payments, which added an extra weekly $600 on top of state benefits during the early phases of the pandemic.

That's why some Californians who chose the withholding option may now be surprised to owe a substantial amount in taxes.

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But didn't Congress just waive taxes on last year's unemployment benefits?

Yes, but with some caveats. Depending on your situation, that could mean you'll end up owing nothing on the benefits you received last year. Possibly you'll still owe some tax if you were on unemployment for many months. Or, if your income was high enough last year, this tax forgiveness may not help you at all.

The new COVID relief bill, known as the American Rescue Plan (ARP), includes a provision that waives federal income taxes on up to $10,200 of unemployment benefits. But this relief is only available to taxpayers with household adjusted gross income of less than $150,000.

Congress just recently passed this provision, and President Joe Biden signed it into law last week. Tax professionals are still figuring out exactly what it means for each of their clients. One CPA told us it could save taxpayers somewhere between $1,500 and $2,500.

When should I file?

That's been a tricky question for many who tapped unemployment last year. And with the IRS now extending the filing deadline to May 17, timelines for many taxpayers are still in flux.

On the one hand, there's the $1,400 stimulus check to consider. Those direct checks phase out completely for individuals who made more than $80,000 in the most recent tax year. That creates an incentive to file quickly for anyone who had a good-paying job in 2019, but lost it in 2020, reducing their income into the range of eligibility for a $1,400 check.

However, tax professionals have been telling many folks with unemployment benefits in their returns to hold off on filing. Why? Because of that tax forgiveness plan just passed by Congress. It was only finalized last week. Tax software still needs to be updated, and professionals need time to figure out how to prepare these returns. Which doesn't leave a lot of time to file before the traditional April 15 deadline (unless it is extended).

If you already filed before Congress passed the new tax waiver, you're probably going to want to file an amended return. Filing an amended return isn't a huge hassle, but it could involve paying your tax professional to take another look at your return to make sure you're saving as much as possible.

What if I can't afford to pay my tax bill this year?

This past year has been tough. Maybe you put every penny of your unemployment money toward rent, groceries, utility bills and other necessities. Maybe your savings is gone. Now you're looking at a hefty tax bill, with nothing in your bank account to pay it off.

Don't panic. You have some options if you can't pay right away. One approach would be to file for an extension. That'll push your filing deadline back. Keep in mind, this isn't an extension on your tax bill, so consider paying off what you can by the traditional filing deadline.

But Los Angeles CPA Rob Seltzer said an extension can help because it "gives you six months to try to come up with the cash for the balance. Interest and dividends will accrue until you pay it in full. But by taking that path, the IRS is not going to bother you."

Or, you could set up a payment plan with the IRS. Taxpayers who owe $50,000 or less can set up monthly payments for up to 72 months. The IRS makes it fairly easy to apply online for this kind of payment plan. Fair warning: choosing this route can involve fees, penalties and interest.

No matter what, Seltzer said even if you can't pay right away, be sure to file.

"Not filing or not doing an extension is absolutely the worst thing you can do," Seltzer said. "The late filing penalties are much, much higher than the late payment penalties. So whatever you do, either file the return or file an extension by the due date."

I got a tax form for unemployment benefits I never applied for or received. What gives?

Unfortunately, you're not alone. State unemployment officials say fraud has been a major problem, and it's possible someone used your personal information to file a false unemployment claim.

If you received an inaccurate 1099-G (the standard tax form for unemployment benefits) and believe your identity has been stolen, EDD has instructions online for reporting suspected fraud. You can also call the department about this issue at 1-866-401-2849 (but be warned that EDD is notorious for letting calls go unanswered).

Even if you did in fact apply for unemployment benefits, don't just take the amounts listed in your 1099-G at face value. Tax professionals say you should always make sure those numbers accurately reflect the money you actually received.

If the form you received is incorrect, or if you never applied for benefits in the first place, contact EDD to ask for a corrected 1099-G. The tax professionals we spoke with are worried that, at this point, getting a corrected form before the filing deadline is probably a long shot. They said you can still file and report the income listed on your current 1099-G -- without paying taxes you shouldn't owe.

What questions do you have about Southern California?