Taxes are a certainty -- we learned that from founding father Ben Franklin's famous quote, "Nothing is certain except death and taxes." But the amount of income taxes you pay each year is a moving target based on your income. If you're one of millions hit hard financially by the coronavirus recession, your efforts to stay afloat may leave you with a surprise tax liability.

In March of 2020, the federal government passed the CARES Act, a $2 trillion relief package to help households and small businesses manage the economic shutdowns prompted by the coronavirus pandemic. The CARES Act enabled stimulus checks, small business loans to cover payroll, and even financial assistance to state and local governments. But there are two CARES Act provisions that could bring some surprises at tax time: expanded unemployment assistance and reduced restrictions on 401k withdrawals.

Concerned young couple reviewing paperwork at a table.

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1. Unemployment income and no withholding

You may be surprised to learn that unemployment income is taxable. You can elect to have income taxes withheld from your unemployment check, but you may not want to. Since the withholding would reduce your income when you need it most, you might be inclined to skip it and deal with the consequences later.

In normal times, that's a reasonable gamble, especially when you expect to replace your job quickly. A typical unemployment check is less than half your working salary, so the tax burden builds slowly.

These are not normal times, however. The first issue is that, in this economy, it may take longer than you'd like to replace the job you lost. Also, unemployment benefits through the end of July included a $600 weekly supplement, a perk enabled by The CARES Act. By itself, that $600 supplement over four months adds more than $9,500 to your taxable income. A longer duration on unemployment, combined with that higher unemployment benefit, can create a sizable and surprising tax liability if you didn't opt into withholding.

2. 401k withdrawals

The CARES Act also made it easier and less expensive to pull money from your 401k. Normally, you'd pay a 10% penalty plus income tax on early 401k withdrawals. In 2020, if you've been affected by COVID-19, the 10% penalty is waived. You still owe the income taxes on the withdrawal, but you can pay those over the next three years. Alternatively, you can repay your withdrawal within three years and skip out on the tax bill entirely.

That doesn't mean you have three years to sit on this tax liability, however. It means you'll owe a third of the taxes on that withdrawal in each of the next three years. Say you take the maximum withdrawal of $100,000 and your effective federal tax rate is 20%. Your total tax liability is $20,000. With no repayment, you'll owe $6,667 in taxes, just on that 401k withdrawal, in 2020, 2021, and 2022. If you end up repaying the distribution within three years, you'll get a credit for the taxes you paid.

There's also another complication to consider. You also owe state tax on your 401k withdrawal. Your state may follow the federal guidelines by giving you three years to pay those taxes, or it may not. Check with your 401k plan administrator or a local tax professional to find out.

Estimating your 2020 taxes

You can't avoid the income tax liability on unemployment or 401k withdrawals, but you still have time to sidestep tax penalties. Tax penalties arise when you don't pay at least 90% of your 2020 tax bill or 100% of your actual 2019 taxes during the 2020 tax year. If you estimate your 2020 taxes now, you still have several months to cover any shortfall and avoid those penalties.

The most accurate tax estimate will come from an experienced tax professional. But if you're short on cash, you'll prefer a free online calculator. Thankfully, the IRS has one that'll do the job.

The Tax Withholding Estimator is designed to help you complete the W-4 form, but you can also use it to estimate your year-end tax liability. The estimator will prompt you for your regular wage income and withholding to date, unemployment income, and any income from 401k withdrawals. Note that the program doesn't automatically account for the special CARES Act tax rules that apply to 2020 401k withdrawals. To adjust for that, use one-third of your actual withdrawal amount. If you pulled $100,000 from your 401k, for example, you'd input $33,333.33 to the estimator.

If the estimator predicts an underpayment for 2020, you'll have to fund the shortfall this year via quarterly tax payments. Those payments can be mailed in with Form 1040-ES or paid online. Alternatively, if you're already back to work, you can increase the amounts withheld from your paycheck and make up the difference that way.