Ok I got out of the Army earlier this year and I am currently collecting unemployment. I have been paying federal and state taxes so far but is that foolish to do? I have heard that the first $2400 of unemployment is tax free anyway and I am married with three kids and have barely worked this year at all so I’m thinking it should pretty much be impossible for me to owe any taxes right and I could certainly use the extra little bit of money that I am paying in for taxes right now. Is there anything else I should take into consideration or would I be smart to stop paying the taxes?
Legal questions should be in IMHO rather than General Questions. Moved.
samclem, moderator
I believe that unemployment income is taxable at the federal level,and at the state level varies by state.
More detail in Pub 525.
When I collected unemployment I decided to not have the taxes taken out because I needed every penny at the time. I got royally fucked come tax time and had to pay out of pocket. I ended up having to set up a payment plan with the IRS. If I had to do it over again, I’d definitely have the taxes taken out up front.
Nothing there says anything about an exemption for “the first $2400”, nor have I ever heard of such a thing. I suspect that the OP may be confusing this with other situations. For example, if one’s entire income for the year came from nothing else than unemployment, then of course there are a bunch of minimums to hurdle over before any tax at all is due. But it seems from the post that the OP left the Army during the current year, so I’m guessing that there’s already enough income from being employed that some tax is indeed due. And if so, then the entire amount of unemployment received will also be taxable. In which case, please consider Hockey Monkey’s post very seriously.
A couple of years ago the first $xxxx was not taxable by the Feds… not anymore. All taxable.
And, if it turns out you don’t owe, they’ll give it all back, which will be a nice windfall. As opposed to owing the IRS, which is Not a Good Thing.
I’ve been on and off unemployment a couple of times and have ALWAYS had the taxes taken out. I was told my the guy who was doing my taxes that that was, in his opinion, the smartest thing to do - it becomes a nasty little suprirse for a lot of people when tax times comes around and they owe a big amount. For me at least, the amount that came out of each check wasn’t going to make that big of a difference, but over time, it added up and I had, like DrDeth said, a nice little windfall.
Chiming in about my personal experience with this as well: I also have gotten royally fucked by not doing this, and have owed big time come tax time. Once year I barely, barely squeaked out of having to pay a penalty for owing too much.
However, I WILL say – if you are temping at least occasionally, lower your tax exemptions on your paycheck and have them withhold a little more, and that should do you okay for federal. (I file a Single tax return though, so with a spouse and kids YMMV.) It’s easier to do without it when you’re making some money, rather than having nothing but that unemployment check.
I am signed up with somewhere in the neighborhood of nine temp agencies, so I have worked just enough to matter, and this is what I did. When I did this, I usually got a small tax refund from federal. State taxes never worked out for me, though, so I withheld them from unemployment regardless. Trying to come up with $500-1000 at the end of the year, when unemployed, seriously sucks.
Been more than a couple, if it ever was that way. My first foray into unemployment was almost a decade ago, and it was taxed then. I remember quite clearly being annoyed at the double-dipping.
I have a friend who opted not to have taxes taken out when he collected unemployment, and then somehow got it in his head he didn’t have to file a return. Eight years later he is still digging his way out of that mess, had to hire a tax attorney, set up a payment plan with the IRS, and will end up paying more in penalties than he ever would have paid in taxes.
Honestly, I’d disagree with that statement.
In the ideal world, you pay all of your bills, you have no debt, your tax withholding covers your tax, and everything is great.
But a lot of real-world people in unemployment take on debt to make ends meet.
If you owe the IRS money, they have a streamlined payment arrangement that can be automatically agreed to if you owe less than $25,000 and will pay off the principal in 60 months. Interest and penalties do continue to accrue, but the combined rate is approximately 9% as an annual percentage rate. It’s possible to negotiate lower payment arrangements - or even suspend making payments - if you provide more financial information via form 433. Plus, the IRS doesn’t pursue collections until you file. You can file as late as October of the following year without a penalty - a deferral of between 22 and 13 months (depending on when the unemployment was received). If you’re willing to pay higher late penalties (25%) you can wait a couple of years before the IRS starts demanding a return.
Compare this to putting the debt on a credit card. Will they charge less than 9%? Will they defer payments for 13+ months? Will they agree to let you stop making payments if you have insufficient income?
So… if your real-world solution means you have to owe someone money, you’re often better off owing it to the IRS than anyone else.
This is only true if several conditions are met:
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You truly understand what income you will be making for the rest of the year (which is why it doesn’t work for someone on unemployment usually) and the tax implications of that income.
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You will have sufficient cash in April to meet those tax obligations. The IRS makes payday loans look generous if you start adding interest and penalties.
You obviously didn’t read the rest of my post then, because I spend it describing why most people are better off owing money to the IRS if they have to owe money to anyone.
Well I only worked the first month of the year in the Army and the taxes were taken out obviously, I sold 60 days of leave that were heavily taxed and I received a severence from the Army that was also taxed although I am supposed to get all of those taxes back supposedly, so what with filling jointly with my wife who didn’t work and went to school full time and claiming three kids that is why my thinking I couldn’t possibly owe taxes and by not paying taxes now I have money I really need at the moment and I would probably only be lowering my tax return a little bit
That’s true- IF you understand the IRS system. IRS notices are pretty scary.
Yeah, you do have to keep calm and work the system to get the best outcome.
Use this: 1040 Tax Calculator. Your 2014 numbers won’t be significantly different from your 2013 numbers.
ETA: speaking for myself, I would have taxes withheld if I could afford to do so. There’s something viscerally scary about owing money at tax time to me.
It was that way… should have said a “few” rather than a “couple”.
That the first $xxx was not taxable by the Feds in the “not too distant past” might explain some confusion that some have. That it is fully taxable now is the real point.
Not to mention that owing money to the IRS and not paying is about the only way you can be thrown in prison for being a debtor. Even if it ever rarely happens, I’d still rather owe money to a credit card company who has essentially no legal recourse over you.
My mom owed tons and tons of debt to various credit card companies, and got by for enough years that its off of her credit history now without ever having to pay a penny. The IRS never forgives your debt, without getting a lawyer who will settle with the IRS for “pennies on the dollar” as you see on TV commercials all the time. But private credit companies can only have things in collections for so long on your credit account before legally it has to go away on its own without any need for lawyers, which many poor folk can’t afford. Plus, there is always bankruptcy options for a lot of private debt. Does that also erase IRS debt?
Anyhow to answer the OP, definitely have the taxes taken out. My dad chose to be on unemployment for an entire year, did NOT have the taxes taken out, and now he is on a payment plan to the federal government. The state government will not set up a payment plan with him and just keep sending him threatening letters until it’s paid off, and he keeps paying a bit each month that he can afford.
Not so. You have personal and other exemptions that wipe out the first 10k 15k of income (dont have my tax info at hand to give exact figures).