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How Does a Temporary Employment Furlough Affect My Taxes?

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How Does a Temporary Employment Furlough Affect My Taxes?

Question-And-Answer

Nick M.-

During the pandemic, millions of businesses were forced to reduce staff or shut down entirely due to quarantine orders.

Some of those jobs will never return. For other workers, their employer may have temporarily furloughed them without a guarantee. The business hopes to bring them back later when the economics improve.

What is a Furlough?

A furlough a mandatory, unpaid temporary leave of absence. It is not a layoff because the employer expects to bring the employee back.

Typically, businesses and the government use furloughs when there is not enough cash to make payroll. Alternatively, companies may furlough employees when there is not enough work for employees during a slow period.

By comparison, a layoff is a lack of work resulting in a separation from employment. Some employers might say a release is temporary, but they are not obligated to bring back the employee.

Fortunately, in most cases, employees do not go through a traditional rehiring process. Typically, they can resume their position as before, with their health insurance and retirement benefits intact.

Unemployment Benefits

Regardless of the circumstances, downsized employees are entitled to apply for unemployment insurance.

When you return to work, your unemployment benefits will end, and your regular pay resumes. Even if you came back with reduced hours and wages, your unemployment and employment pay would both be taxable income.

Before the pandemic, unemployment income was taxable as ordinary income. In other words, it is taxed at the same rate as your regular paycheck. Since then, nothing has changed, and unemployment checks must still be taxed the same as your standard pay.

Stimulus Checks

Many Americans received a stimulus payment under the CARES Act.

CARES stands for Coronavirus Aid, Relief and Economic Security. Congress signed this legislation into law in March 2020. It provided over $2 trillion of economic assistance for workers, small businesses, and families. The intention was to help preserve jobs.

Because stimulus funds operate around your past taxable income, most people will not pay income tax on their deposit. The IRS treats it as a refund rather than earned income.

The CARES Act provided direct payments of $1,200 for individuals and $2,400 for joint taxpayers. Those with a qualifying child under age 17 received $500 for each child.

The payment amounts were based on the most recent tax filings: either 2018 or 2019. Approximately 80% of Americans were eligible for relief.

Individuals who have an adjusted gross income (AGI) up to $75,000 or $150,000 married filing jointly could qualify. Most received the full rebate amount.

However, not everyone received a stimulus check. Income levels above the threshold received less. People above $99,000 who filed single, $136,500 for head of household, and $198,000 for joint filers with no kids did not receive any relief funds.

A spyglass with the word Furlough in focus

Filing Taxes and Refunds

If you received refunds in the past, it means you allowed your employer to withhold more taxes than the government required. They return the surplus to you without interest. Essentially, you give the government a tax-free loan during the year.

If you were furloughed or laid off this year, your tax refund might be smaller. The refund is directly related to how much you earn. When you earn less, your refund will also be less.

What if you didn’t have any taxes withheld? Then you must pay those taxes on your next tax filing.

If you did not withhold enough taxes on your unemployment checks, you could compensate when returning to work.

Review your W-4 Withholding form at work. The IRS publishes the W-4 form to help you determine how much, if any, money your employer should withhold for taxes. When you complete the W-4 accurately, it prevents a big tax surprise the next year. Plus, you can avoid overpaying taxes if you don’t withhold much. In turn, it offers more take-home pay to spend on bills and necessities.

Enter your information into the IRS Tax Withholding calculator to receive an estimate. You can determine whether to withhold more from your paycheck or receive higher take-home pay. Then, you can decide if it is best to modify your W-4 or leave it as-is.

Tax Credits

Now, you might qualify for tax deductions and credits that you did not previously.

Take a look at the Earned Income Tax Credit, education benefits, and the Savers Credit.

Tax Bracket

Depending on your income, you may find yourself in a different tax bracket this year.

The months spent unemployed undoubtedly resulted in income lower than usual. If it was enough to drop you down to a lower threshold, you might have a reduced tax annual tax bill.

Tax deductions can reduce your taxable income. You can ease your tax bill by using tax credits.

Editor’s Notes

If you became furloughed or laid off during the pandemic, check with your state government to determine what benefits are available.

Once you can estimate your income for the year, use a calculator like the one the IRS provides, to figure how much taxes you will pay. Once you return to work, you can modify how much you pay and reduce or increase your take-home pay.

Either way, it could affect your tax burden for better or worse. If you face a potentially large tax bill, connect with a local tax professional for advice. We recommend working with a CPA (certified public accountant) or Enrolled Agent (EA). They are both licensed to provide accurate IRS tax info. Plus, they have the credentials to offer advice on how best to manage your tax burdens.

They may also provide you with information about other tax deductions or tax credits for which you could qualify. You could be eligible to contribute more to your retirement accounts to reduce your taxable income.

Whatever your situation, we always suggest consulting with a professional advisor.

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