This article should not be considered financial advice. Consult your tax professional for advice on your specific situation. 

Tax time is here and W2s are now being sent out for the 2020 tax year. Some people who lost a job and received unemployment benefits in 2020 might be surprised with a tax bill if they didn't plan ahead.

For South Dakota residents, generally speaking, unemployment benefits are not taxable, according to Kiplinger.

However, just because Pierre doesn't collect income tax on unemployment benefits doesn't stop Washington, D.C. from doing it. Uncle Sam always gets his cut.

According to the IRS website, "By law, unemployment compensation is taxable and must be reported on a 2020 federal income tax return. Taxable benefits include any of the special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted this spring."

Yes, even that extra $600 weekly benefit from the CARES Act that was paid out in 2020 is taxable. For example, if a person collected the $600 weekly bonus for 16 weeks, they would have to pay taxes on that extra $9,600 as well as their regular unemployment benefit for the 2020 tax year.

There are certain credits that can offset taxes on unemployment benefits such as earned income tax credit, dependent care and child tax credits, and retirement savings credit. Consult a tax professional to see if you qualify.

If you do end up owing taxes on your unemployment benefits, the IRS has a few ways to pay over a period of time. However, even if you set up a payment plan with the IRS, you still might be required to pay interest and possibly penalties on the unpaid amount.

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