Tax Season 2020 Unemployment Compensation

Hello Everybody,

2020 sure has been a shock to everyone this year. I wanted to make a blog post about how unemployment compensation may affect your tax return this year.

Once the national lockdown began, there was an estimated 20.5 million jobs lost in the month of April. I am not sure how many jobs came back exactly but many individual's, especially in New York City where lockdown rules were stricter compared to other areas in the nation, have been collecting unemployment and will continue until the end of year.

How to file unemployment compensation on your tax return for 2020.

When you first apply for unemployment benefits the department of labor asks you if you choose to withhold taxes upfront so you wouldn't have to worry once tax day comes. Usually by January 31st of the new year you will receive a Form 1099-G Statement of Certain Government payments. If you don't, don't forget that you can print out your Form 1099-G when you created your NYS UI account. Now once you receive the Form 1099-G; Line 1 Unemployment Compensation, will list your total annual unemployment compensation you received for the year. Line 4 will list the Federal Income Tax Withheld and Line 11 will list the State Income Tax withheld.

With this information you report this on your Schedule 1 form that goes along with your Form 1040. Unemployment compensation is taxed at the Federal and State levels (some states do not charge tax on unemployment compensation, but New York does... HOORAY!) but it is not subject to FICA Taxes (SS and Medicare).

The Bad News

The real reason I wanted to write this blog post is because many families rely on the Earned Income Tax Credit and since there were so many families collecting unemployment compensation, they may be in for a rude surprise. Unemployment compensation does not count as earned income. This means that a tax payer who only worked three months out of the year and collected nine months of UI; may not receive the same tax refund compared to 2019.

For example:

A married couple with three children who earned $25,000 Earned Income (not unemployment compensation) on their tax return for 2020 would receive $6,557 of earned income credit on their tax return.

Now if that same married couple earned $25,000 in Unemployment compensation they would unfortunately not be eligible to qualify for any earned income credit.

The Bottom Line

Your unemployment compensation is taxable and it may effect how much EIC you may be eligible for.