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Unemployment benefits received during the pandemic are taxable

There are a couple of simple ways to stay ahead of the situation, and there's possible relief for those who can't

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Photo (c) Michail_Petrov-96 - Getty Images
The hits keep on comin'! On Friday, the Bureau of Labor Statistics announced that the economy lost 20.5 million jobs in April, with the unemployment rate at 14.7 percent.

Thank you, COVID-19.

All told, upwards of 22 million Americans have lost their jobs during the pandemic, forcing many to collect unemployment to make ends meet. For some, a bonus of $600 each week in coronavirus relief is being added on. 

All that is fine and dandy for now, but most of those check recipients are unaware that they're going to have to pay taxes on that money because the IRS views it as "taxable income." Note: the "economic impact payment" Americans received is NOT taxable.

"Most people don't realize it. They're thinking in the moment. They don't have much savings, credit is not great and then come April 15, 2021, you have a big tax bill you're not expecting," Ken Lin, the CEO of Credit Karma, told CNBC.

Is there a way around this?

Isn't there some crafty way to avoid paying taxes on unemployment and checks? The short answer is no.

Unlike Medicare and Social Security benefits, both the U.S. government and almost every single individual state taxes unemployment benefits. The states that don't tax unemployment benefits include California, Montana, New Jersey, Pennsylvania, and Virginia. Wisconsin residents get a slight break on a portion of their unemployment benefits, but according to U.S. News' homework on the matter, it appears to be a rather complicated formula.

The best way around this

Lin told CNBC that, back in the early 2000s, he received unemployment benefits after losing his job at a tech company. He admitted that he was clueless that his compensation would be taxed. "Planning is what really matters. You can avoid all of that by putting dollars aside today," he said. 

Taking part of the unemployment check and setting it aside like Lin suggests -- or asking the state unemployment agency to have a portion (say 10 percent) of the check withheld to cover federal income tax when April 15 rolls around next year -- are the simplest, smartest things to do.

This whole pandemic is forcing almost everyone to rethink how they can manage life without collapsing. For some taxpayers, stowing away part of the benefits is impossible with the necessities that have to be paid for while unemployed.

The 2020 tax year is far from typical, and many consumers will be learning on the fly as they try to stay on good terms with Uncle Sam. If you're in need of assistance for tax relief, visit ConsumerAffairs guide here.

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