Avoid Shock of Owing More Than You Expected
With all the distractions and turmoil triggered by the pandemic, it may seem surprising that the fourth quarter of 2020 is upon us … and that means limited time to do a “Paycheck Checkup” to make sure the right amount of tax is withheld from your earnings.
What to Do
Your objective is to determine if there is a need to adjust your withholding. If that proves to be the case, your next step is to submit and new Form W-4, Employee’s Withholding Certificate to your employer. All taxpayers should check, but especially those who fit the following profiles.
• Are a two-income family or someone with multiple jobs
• Work a seasonal job or only work part of the year
• Claim the child tax credit
• Have dependents age 17 or older
• Itemized your deductions in previous tax years
• Have high income or a complex tax return
• Had a large tax refund last year
• Had a tax bill last year
• Received unemployment at any time during the year
• Experienced a significant life-changing event, e.g. marriage, childbirth, adoption, home purchase.
A quick way to make sure you are having the right amount of tax taken out of your pay is to use the IRS Tax Withholding Estimator. It will help you to lessen year-end tax bills or more optimistically estimate a refund.
Important! If you have a substantial portion of income not subject to withholding, (e.g. the self-employed, investors, retirees, those with interest, dividends, capital gains, alimony, and rental income), you may need to pay quarterly installments of estimated tax.
Note: Blair + Assoc is as close as a phone call or email away to assist you.
You may be one of millions of Americans currently receiving unemployment compensation … or did so earlier this year. If that’s the case, it’s important for you to know that the IRS considers unemployment benefits as taxable income.
Taxable benefits include any of the special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act approved by Congress and signed by the President earlier this year. So, consider having taxes withheld now and avoid owing when you file your 2020 return.
Withholding is voluntary. That said, you may choose to have a flat 10 percent withheld from your benefits to cover all or part of your tax liability. To do that, fill out Form W-4V, Voluntary Withholding Request (PDF), and give it to the agency paying the benefits. Do not send it to the IRS. If the payor has its own withholding request form, use that form instead
If you don’t choose voluntary withholding, or if the withholding isn’t enough, you can make quarterly estimated tax payments. Fourth quarter 2020 payments will be due on January 15, 2021.
As an unemployment benefit recipient, expect to receive a Form 1099-G, Certain Government Payments (PDF), from the agency paying the benefits. The form will show the amount of unemployment compensation you received during 2020 as well as any federal income tax withheld. This information, along with your W-2 income, will be included on your 2020 federal tax return.
Note: Unlike some other states, the Commonwealth of Virginia does not tax unemployment earnings.
Other Types of Payments to Check for Withholding
The IRS urges taxpayer to check the following sources of payments to check for withholding:
• Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund
• Railroad unemployment compensation benefits
• Disability benefits paid as a substitute for unemployment compensation
If you own stocks, bonds, mutual funds or other investments … be sure to check with your investment advisor to determine any realized gains or losses that may affect your tax status.
Have Immediate Questions or Concerns!
Blair + Assoc stand ready to help as needed. A phone call or email is all it takes.
We’ll respond promptly.