Tax day has been extended to a month to May 15 this year. And a new study has found that about one-third of those who have yet to file this year are uncertain if they’ll receive a refund.
NORC at the University of Chicago recently surveyed more than 1,000 adults and found that 32 percent of those who responded to the survey were unsure of whether or not they would be due a tax refund this year. Part of the reason for this uncertainty is how unique 2020 was. Tens of millions of Americans went on unemployment in the wake of the COVID-19 pandemic — and contrary to what many people believe, you still have to pay taxes against unemployment benefits.
The bottom line is that taxes are complex in a normal year — throw in a pandemic and the various complexities associated with that, and they’re only going to get more complex. In this post, we’ll take a closer look at why you’re likely getting a refund this year, why you might not, and what you can do in the future so you know what’s coming.
Why You’re (Probably) Getting a Refund
In a normal year, about 75 percent of all tax filers receive some sort of refund. If you didn’t go on unemployment and your earnings stayed similar to the previous filing year, chances are you’ll receive a similar refund.
Even if you did go on unemployment for an extended period of time, you may not be on the hook for any or all of the taxes. Thanks to the American Rescue Plan that was signed into law last month, the first $10,200 of unemployment benefits is income tax-free per individual, and the first $20,400 is tax-free for married couples filing jointly.
Why You Might Owe Uncle Sam
Simply put, you’ll owe the IRS when your tax withholdings from your paycheck throughout the year were not enough. For instance, if you were on unemployment, but didn’t receive at least $10,200 in benefits, you’re still on the hook for income taxes. Even if you were on unemployment and received more than $10,200 in benefits, you’ll have to pay taxes on anything over the $10,200 amount that you received.
Additionally, maybe you started to freelance or work a side hustle to make ends meet. Those have a completely different tax filing structure, which could come back to nip you at tax time. Maybe you did really well in 2020 and received a promotion that knocked you into a higher tax bracket. If so, you could receive less of a refund or wind up owing some money in taxes depending on your withholdings.
So, how do you ensure you’re not owing the IRS moving forward? First, know your tax bracket. Next, do some math to make sure that what’s being withheld from your paycheck aligns with the percent in taxes you’ll pay. And third, consider changing your withholdings if they’re not in alignment.