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More than half of states have been approved for the $300 unemployment benefit—but don't forget about taxes

The extra $300 unemployment benefit will be considered taxable income in April. Here's how to pad your savings account in preparation.

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More than half the U.S. states have received federal approval to offer an extra $300 per week in "lost wages assistance" per an executive order that President Donald Trump signed on August 8. 

If you are currently receiving unemployment benefits, the federal government could be sending you additional funds soon. And although local governments themselves are cash-strapped, some states will also be contributing an additional $100.

Some 1 million people filed for unemployment last week according to the U.S. Department of Labor's latest data. Applications have seemed to slow since the pandemic's onset, but not enough to truly counteract the surge of 40 million unemployment applications that came within the first 10 weeks of the outbreak. Many are still unemployed despite phased reopenings, and people in every state need continued assistance.

It's important for the people tapping this assistance to remember that, come April 2021, your unemployment benefits will be considered taxable income. While you won't have to pay payroll taxes on unemployment, such as Social Security and Medicare withholdings, you will get taxed according to your income level for 2020.

The National Foundation for Credit Counseling (NFCC) points out that you can sometimes ask your state unemployment office to withhold taxes, the same way an employer would. But because many states are scrambling to complete applications and rush checks out, you may want to take matters into your own hands.

One option is to file and pay your taxes quarterly. But perhaps the simplest way to handle the taxes on unemployment is to just pay in full next April.

The amount you will have to pay varies widely depending on your tax bracket and which state you live in. Everyone will owe federal income tax on unemployment, but six states exempt the benefit from what's considered taxable income. Another handful don't have income tax at all.

Federal income tax ranges from about 10% to 37% of your annual income minus any deductions. Your taxes are calculated based on your earnings, and as you earn more you pay the rate for the income that falls within that bracket. You'll pay 12% taxes on income you earn between $9,875 and $40,125. Income between $40,125 and $85,525 will be taxed at the higher rate of 24%, and so on. So if you make less than $85,525 in 2020, it's a safe bet to stash away between 12% and 24% of your unemployment checks to prepare for tax time.

Consider putting your money in a high-yield savings account to earn more than 10X the interest you would in a traditional savings account with an interest rate of 0.06%.

High-yield savings accounts have their pros and cons, but because they compound interest daily, a little bit of steady savings each week can go a long way.

We calculated that by making a $20 weekly deposit into a high-yield account with APY of about 1.05%, you can save $1,000 in one year. In the roughly eight months between now and April 15, you should have plenty of time to prepare a helpful stash of cash if you find you have some wiggle room in your budget after paying for the essentials.

CNBC Select rated our top five savings accounts, taking into account the APY, ease of use, accessibility and other features. None of these accounts charge monthly fees and they all have either no or low minimum balance requirements. Each account is FDIC-insured.

Here are our picks for the top high-yield savings accounts:

If you want to earn the most interest in a short period of time, the Varo Savings Account may be an optimal choice.

Varo stands out for its opportunity to earn over double the normal interest: First, earn .40% APY regardless of your account balance. Then, earn up to 2.80% APY if you meet certain monthly requirements (see what the requirements are here). 

Varo Savings Account

Information about the Varo Savings Account has been collected independently by CNBC and has not been reviewed or provided by the bank prior to publication. Bank Account Services are provided by Varo Bank, N.A., Member FDIC.
  • Annual Percentage Yield (APY)

    Begin earning 0.20% and qualify to earn 3.00% if you meet requirements^

  • Minimum balance

    None; $0.01 to earn savings interest

  • Monthly fee

    None

  • Maximum transactions

    Up to 6 free withdrawals or transfers per statement cycle *The 6/statement cycle withdrawal limit is waived during the coronavirus outbreak under Regulation D

  • Excessive transactions fee

    None

  • Overdraft fees

    None

  • Offer checking account?

    Yes

  • Offer ATM card?

    Yes, if you have a Varo Bank Account

Terms apply.

 

Information about Marcus by Goldman Sachs High Yield Online Savings, Ally Online Savings Account, Synchrony Bank High Yield Savings, Vio Bank High Yield Online Savings Account, and Varo Savings Account has been collected independently by CNBC and has not been reviewed or provided by the bank prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.