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Unemployment Benefits Are Taxable
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Last year was a year to forget, especially if you were one of the many millions to lose their job. Fortunately, through various stimulus packages and other laws, unemployment benefits were extended to help people through a difficult time. Unfortunately, some of those unemployment benefits are taxable as income. 
Fortunately, for the 2009 tax year, not every dollar is taxed. The American Recovery and Reinvestment Act made the first $2,400 of unemployment benefits tax-free. After that, the remaining benefits is considered taxable income.
Form 1099-G
The state will mail you a Form 1099-G, sometime after January 31st, that you will need to prepare your tax return. The 1099-G is for “Certain Government Payments” and Box 1 will list how much Unemployment Compensation you received. Remember to include the benefits when you file your return.
For more information on recognizing unemployment compensation on your tax return, please review Topic 418, here’s a passage on the definition of unemployment compesation:
Unemployment compensation generally includes any amounts received under the unemployment compensation laws of the United States or of a state. It includes state unemployment insurance benefits and benefits paid to you by a state or the District of Columbia from the Federal Unemployment Trust Fund. It also includes railroad unemployment compensation benefits, disability benefits paid as a substitute for unemployment compensation, trade readjustment allowances under the Trade Act of 1974, and unemployment assistance under the Disaster Relief and Emergency Assistance Act of 1974. Unemployment compensation does not include worker’s compensation.
You May Elect Withholding
If you are currently receiving unemployment compensation, you can have taxes withheld from government payments by filing a W-4V Voluntary Withholding Request. If you don’t, you may have to make estimated tax payments every quarter to avoid a penalty.
Why would you want to elect withholding? You’ll still have to pay taxes next April on the benefits, so it might be better, from a planning perspective, to have the taxes withheld now. This way the taxes are taken care of, you won’t be sent scrambling next April to come up with money to pay income tax.
Forgot Taxes? Start Saving.
While it stinks to have to pay taxes, hopefully you knew about it. If you didn’t, now you do, almost three months before the taxes are due.
(Photo: Phillip)
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I never quite understoof why unemployment was taxed. It’s income, but more of a susidy. Are food stamps taxed? Are subsidized payments for housing taxed? My guess is no.
It’s a realized gain for the recipient. Other than the $2,400 exemption, why shouldn’t it be taxed?
I may be wrong, but aren’t the other programs you cited for the benefit of people who more regularly fall below a certain income level?
My general thought is that unemployment benefits are intended to be more of a temporary fix to what should (hopefully) be a temporary problem.
But aren’t other subsidizes a realized gain?
The other programs are, but I don’t see that as meaning that they aren’t like other subsidies. Low-income individuals can be on unemployment and working individuals can use food stamps.
I would say that food stamps and subsidized housing are both also meant to be a temporary fix.
(I’m not saying whether they are right or not, or trying to be political, I just don’t see what the difference is and why unemployment would be taxed and others wouldn’t.)
The other subsidies are government financed. Unemployment, in theory, is fully funded by employers (and, as I found out recently, employees in some states) through FUTA.
So, essentially, it’s (supposed to be) a transfer from a group of employers to a group of employees through the conduit of the government.
To clarify – I mean the other programs are funded from the pool of general money that the government obtains through taxes, whereas the money from FUTA is earmarked for unemployment benefits.
The government cannot, of course, fund any programs without the tax revenue from companies and individuals.
That makes sense. So I would assume it’s not taxed any other time between.
Geoff – I assume that you’re asking whether this is money that has been previously taxed at the corporate level?
It has been a long time since I’ve studied corporate tax (junior year of college), but I am 99% sure that the amount paid to FUTA is deducted from income before the income is taxed – just as any other business expense.
This hits home. My wife was unemployed for the majority of 2009, and the 1099-G is the final form we’re waiting on in order to complete our tax return. Fortunately, we anticipated the taxes and saved money ahead of time.
I didn’t realize that unemployment benefits were taxed but I guess it makes sense because of how it’s funded.
Unemployment benefits are meant to help you over the rough spots while you look for another job.
Essentially ‘looking for another job’ is now your job, and the financial benefit is now your salary. Why wouldn’t it be taxed?
Much better way of saying what I was trying to. Thanks Shirley!
this is a good way to put it into perspective, i did nto consider this.
Great information to know. I am not currently or have been on unemployment, but you never know when that day could come…
I’m fine with unemployment being taxed. if not, then i think it should be repaid at a minimal interest rate.
I’m fine with it being taxed, but repayment is a slippery slope.