Unemployment can be stressful enough without having to figure out the tax treatment of the unemployment benefits you receive.
The IRS considers unemployment benefits taxable income. Unemployment compensation generally includes, among other forms, state unemployment compensation benefits, but the tax implications depend on the type of program paying the benefits.
Here are five tips from the IRS about unemployment benefits.
1. Report All Unemployment Income
You must include all unemployment compensation you receive in your total income for the year. You should receive an IRS Form 1099-G, “Certain Government Payments,” with the total unemployment compensation paid to you shown in box 1.
- Federal tax withheld will be listed in box 4
- State tax withheld will be listed in box 11
Report unemployment compensation on line 7 of Schedule 1 (IRS Form 1040), Additional Income and Adjustments to Income, and attach it to Form 1040 or Form 1040-SR. Include the withholding shown in Box 4 on line 25b of Form 1040 or Form 1040-SR.
2. Know What Benefits Are Available
Unemployment benefits are monetary compensation paid out by the federal and/or state government to people who are unemployed. However, there are several types of unemployment benefits you may be eligible for. These include:
- Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund
- Railroad unemployment compensation benefits
- Disability payments from a government program paid as a substitute for unemployment compensation
- Trade readjustment allowances under the Trade Act of 1974
- Unemployment assistance under the Disaster Relief and Emergency Assistance Act
For complete information on each of the benefits listed, see chapter 12 in IRS Publication 17, Your Federal Income Tax, or Publication 525, Taxable and Nontaxable Income.
3. Report Union Benefits Correctly
You must report benefits paid to you as an unemployed member of a union from regular union dues. However, if you contribute to a special union fund and your payments to the fund are not deductible, you only need to include in your income the unemployment benefits that exceed the amount of your contributions.
4. Consider Tax Withholding on Your Benefits
You can choose to have federal income tax withheld from your unemployment compensation. To make this choice, complete Form W-4V, Voluntary Withholding Request, and give it to the paying office. Tax will be withheld at 10 percent of your payment. Withholding your taxes from your benefits can help you avoid a large tax bill come tax day. If you choose not to have tax withheld, you may have to make estimated tax payments throughout the year.
5. Unemployment Can Impact Your Eligibility for Tax Credits
If you receive unemployment compensation, that can affect what tax credits you are eligible for. For instance, the Child Tax Credit is a partially refundable credit worth up to $2,000 per qualifying dependent. But because it reduces your tax bill dollar for dollar, you have to have taxable income to claim it. If your tax bill is less than $2,000, you won’t be able to use the full credit and you won’t be eligible to claim the Additional Child Tax Credit (which requires more than $2,500 in earned income for the year).
Additionally, the Earned Income Credit is a valuable tax credit for low income taxpayers. But Social Security and unemployment benefits do not qualify as earned income.
If you’re dealing with unemployment benefits this year, ezTaxReturn can help. We walk you through the tax filing process every step of the way to get you the biggest refund possible.