Tax implications of Colorado unemployment benefits
When Amy DeGraaffiled her first unemployment claim at the start of the pandemic, she did not ask the Colorado labor department to withhold taxes.
DeGraaf, a single mother who supports her family as a waitress in Gunnison, knew she would owe at the end of the year, but “I needed every dime,” she said. And she figured her earned income credit on her IRS tax form would balance out the money she received through unemployment insurance, making everything a wash come April 15.
DeGraaf didn’t realize the extra federal benefits would wipe out her earned income credit. DeGraaf said she owes about $2,000 in taxes.
“I feel like if it’s stimulus money it shouldn’t go against you,” DeGraaf. “I was shocked. I always follow this stuff really well.”
As 2020 taxes come due, people who received unemployment compensation amid the pandemic are finding themselves dealing with tax complications.
“It’s a hard year for taxpayers,” said Courtney O’Reilly, director of Tax Help Colorado. “There are some complicated pieces this year.”
Some people never realized they would owe taxes on unemployment benefits even though they were asked if they wanted to withhold taxes on their applications. Others were desperate to pay bills and support families and decided to worry about taxes later. And then there are those who didn’t estimate how much the stimulus payments would increase their income.
“I have absolutely no judgment for people who aren’t withholding,” O’Reilly said. “People are struggling right now and doing everything they can to make ends meet, including not taking withholdings. It’s just a really hard time.”
Help could be on the way.
The latest version of a $1.9 million stimulus package under debate in the U.S. Senate includes a provision that would forgive up to $10,200 in taxes on unemployment benefits paid in 2020. The proposal is part of a compromise hammered out among Senate Democrats, and it could be approved Friday night.
Federal and state governments always tax unemployment benefits paid to jobless workers, and the Colorado Department of Labor and Employment warned state residents applying for benefits, offering the option to have taxes withheld.
In normal times, jobless workers in Colorado can earn a maximum of $618 per week for up to 26 weeks. This year, however, the federal government added an extra $600 per week to unemployment payments for 16 weeks in April through July. The federal stimulus plan also allowed people to collect unemployment benefits well past 26 weeks.
And, in Colorado, many people received a one-time $375 payment authorized by Gov. Jared Polis.
All of that is taxable income.
The stimulus checks sent to most Americans are the exception. Those $1,200 payments at the start of the pandemic are not taxable, and neither are the $600 payments delivered at the start of 2021.
Carolyn Winnett, of Fort Collins, worked two seasonal, part-time jobs until the pandemic started. At 75, she works the two jobs to supplement her Social Security payments, and because they are seasonal, she files for unemployment each year when they end.
She never withheld taxes because the weekly payments were low and didn’t have much of an impact on her taxes. She typically keeps a savings account and if she owed a little at the end of the year, she would have money to pay the IRS.
This year, though, the early pandemic stimulus payments bumped what was typically a $200-per-week benefit to $800. She also received the Polis stimulus.
“Therein lie the taxes,” she said.
Winnett said she tried to save 10% of every unemployment payment. But now her tax bill is going to wipe out the savings.
She owes $1,300.
“I haven’t paid that much since I don’t know when,” Winnett said. “It’s going to hurt. I’m going to be in that cycle where I hope the refrigerator doesn’t go out.”
The tax complications are widespread, said O’Reilly, whose agency helps families whose earnings are $57,000 or less per year. She recently helped a college student who lost a part-time job in the restaurant industry. Because of the unemployment payments, he had to file a tax return for the first time and owed money even though his parents were claiming him as a dependent.
People are allowed to use their 2019 earned income credit to calculate their tax returns. But that may not help everyone, she said.
If people owe taxes but don’t have the money, there are programs available to help them negotiate with the IRS, O’Reilly said. People should look for Low Income Taxpayer Clinics, where advocates can help. She also recommends filing early and paying as much as possible upfront to avoid interest and fees the IRS may charge.
“The biggest mistake I see people making is just deciding not to file,” O’Reilly said. “They see that amount they owe and just try to run away from it.”
As for DeGraaf, she’s waiting to file her taxes until the last minute so she can see what Congress does. A waiver on the first $10,200 in taxes would drop her income enough that she would not owe money.
And if that fails, she would qualify for the $1,400 non-taxable payments to individuals who earn less than $75,000 annually. DeGraaf said she would “use that money to give right back to them.”
“We will figure it out like we always do,” she said.
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