- Days left

Jobless? Uncle Sam Still Taxes Your Unemployment Benefits

×
CEH12J A man with empty pockets man; empty; pockets; poor; bad; bankrupt; bankruptcy; broke; business; cash; concept; credit; cr
Alamy
The economic recovery has left millions of Americans behind, struggling to find jobs and leaving millions unemployed for extended periods of time. Yet as April 15 approaches, many unemployed people discover that the Internal Revenue Service wants its share of the meager unemployment benefits that they've received.

How Unemployment Benefits Get Taxed

Most benefits you receive from being out of work are subject to federal income tax as unemployment compensation. The IRS defines unemployment compensation as including money you get either from the federal government or from various state governments under unemployment-insurance laws, which includes the most common forms of unemployment benefits for the vast majority of recipients. In addition to general state and federal unemployment insurance, more specialized benefits like those under railroad unemployment rules also get treated as taxable income.

For the most part, even though benefits are subject to federal income tax, you don't have to pay additional taxes like Social Security or Medicare withholding. But some unemployed people get additional assistance from private funds that their employers contribute to on their behalf. In those cases, not only are the benefits taxable, but you might even have to pay additional withholding taxes and treat them the same way that wages and salaries get handled.

On the other hand, other people have jobs at which they themselves make voluntary contributions to private funds that pay benefits to unemployed workers. If you receive benefits from that type of fund, then you only pay tax on the amount you receive that exceeds what you contributed to that private fund.

Why Does the IRS Tax Unemployment Benefits?

The rationale for including unemployment benefits as taxable income is that they're meant to replace wage income that you'd earn if you actually had a job. As a result, if you're getting unemployment in lieu of working, then the IRS believes it makes sense to treat those benefits the same way it would treat your salary, wages, and tips.

Yet in other areas of the tax laws, the IRS doesn't treat unemployment benefits the same way. For instance, if you want to contribute to a Individual Retirement Account or something similar, you need to have what the IRS calls earned income. Earned income includes wages and salaries, but it explicitly excludes unemployment compensation. Moreover, several states, including California, New Jersey, and Virginia, exempt unemployment benefits from state income tax laws.

Nevertheless, despite some of these inconsistencies, it doesn't change the fact that you need to prepare to give the IRS its share of your unemployment check.

What to Watch For

One thing to check is whether you've had taxes already withheld from your unemployment benefits before you receive them. If you completed a voluntary withholding request on Form W-4V when you signed up for benefits, then the 1099-G tax form that you'll get should have both the total unemployment benefits you received and tax you've paid. Be sure to include that tax in the payments line on your tax return to get proper credit.

On the other hand, many people run don't have enough tax withheld. If that's the case, then you might owe even more to the IRS in interest and penalties. To avoid that problem in future years, many unemployed people must pay quarterly estimated taxes and spread out their tax payments throughout the year.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+.

Increase your money and finance knowledge from home

Managing your Portfolio

Keeping your portfolio and financial life fit!

View Course »

Goal Setting

Want to succeed? Then you need goals!

View Course »

TurboTax Articles

What is IRS Form 8824: Like-Kind Exchange

Ordinarily, when you sell something for more than what you paid to get it, you have a capital gain; when you sell it for less than what you paid, you have a capital loss. Both can affect your taxes. But if you immediately buy a similar property to replace the one you sold, the tax code calls that a "like-kind exchange," and it lets you delay some or all of the tax effects. The Internal Revenue Service (IRS) uses Form 8824 for like-kind exchanges.

What are ABLE Accounts? Tax Benefits Explained

Achieving a Better Life Experience (ABLE) accounts allow the families of disabled young people to set aside money for their care in a way that earns special tax benefits. ABLE accounts work much like the so-called 529 accounts that families can use to save money for education; in fact, an ABLE account is really a special kind of 529.

What is IRS Form 8829: Expenses for Business Use of Your Home

One of the many benefits of working at home is that you can deduct legitimate expenses from your taxes. The downside is that since home office tax deductions are so easily abused, the Internal Revenue Service (IRS) tends to scrutinize them more closely than other parts of your tax return. However, if you are able to substantiate your home office deductions, you shouldn't be afraid to claim them. IRS Form 8829 helps you determine what you can and cannot claim.

What is IRS Form 8859: Carryforward of D.C. First-Time Homebuyer Credit

Form 8859 is a tax form that will never be used by the majority of taxpayers. However, if you live in the District of Columbia (D.C.), it could be the key to saving thousands of dollars on your taxes. While many first-time home purchasers in D.C. are entitled to a federal tax credit, Form 8859 calculates the amount of carry-forward credit you can use in future years, not the amount of your initial tax credit.

What is IRS Form 8379: Injured Spouse Allocation

The Internal Revenue Service (IRS) has the power to seize income tax refunds when a taxpayer owes certain debts, such as unpaid taxes or overdue child support. Sometimes, a married couple's joint tax refund will be seized because of a debt for which only one spouse is responsible. When that happens, the other spouse is said to be "injured" and can file Form 8379 to get at least some of the refund.

Add a Comment

*0 / 3000 Character Maximum

42 Comments

Filter by:
nthereoff

Unemployment benefits should be taxed . It's income, .

March 24 2014 at 10:29 AM Report abuse +1 rate up rate down Reply
janeswizzle

Hey Obama , you should be impeached !

March 22 2014 at 10:52 PM Report abuse -1 rate up rate down Reply
janeswizzle

Hey Barry, how'syour Somallian Pirates doing ?

March 22 2014 at 10:48 PM Report abuse rate up rate down Reply
betty_brock

Obama is turning unemployment compensation into another welfare scam. It was never intended to be used long term.

March 22 2014 at 1:18 PM Report abuse rate up rate down Reply
alfredschrader

This is a minor issue compared to the bigger picture. Soon robots are going to be doing everything. Right now cashiers are being converted to robots by automatic ring-out machines.
90% of all jobs are going to be done by robots. Out of necessity we will have to increase unemployment benefits to three years, lower the retirement age by ten years, and increase the scope of WiC, foodstamps, and Medicaid. Or create new robo benefits.

March 22 2014 at 8:56 AM Report abuse rate up rate down Reply
Fran

yes they do this and the state will come after you for them taxes and take everything even if you do not work they don't care they come after you back account and anything they can get. this country has gone so downhill and it is not obama dem or rep it is all of them so please don't reply this is because of obama. this country has a bad case of head up ass and getting very bad.

March 22 2014 at 7:51 AM Report abuse +2 rate up rate down Reply
obamasacrybaby

Please can somebody give me back my crack pipe.

March 21 2014 at 8:58 PM Report abuse rate up rate down Reply
crackpot.conservative

skcarcomed_2, demsbaitnswitch3 ,.......you two sound just like the other crackpot conservatives that live in my trailer park.

March 21 2014 at 8:34 PM Report abuse rate up rate down Reply
crackpot.conservative

I try to help my fellow conservatives. I tell them to buy a power tooth brush that way they don't have to do it manually any more.

March 21 2014 at 8:27 PM Report abuse -2 rate up rate down Reply
pwellbaum

Word of advice to all. Be careful when you move from one State to another. I moved from a State with no State taxes to another State with state taxes. I was over my maximum yearly earnings and had to pay the IRS state taxes. I got hammered!!!. Big mistake!. I learned my lesson with that one. Don't make the same mistake I did.

March 21 2014 at 8:23 PM Report abuse rate up rate down Reply