Unemployment Benefits Are Taxable

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Tax CalculatorLast 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)

{ 26 comments, please add your thoughts now! }

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26 Responses to “Unemployment Benefits Are Taxable”

  1. cubiclegeoff says:

    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.

    • NateUVM says:

      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.

      • cubiclegeoff says:

        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.

          • cubiclegeoff says:

            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.

    • cubieK says:

      I’ve thought the exact same thing. Why should the unemployed, many who worked all their lives and now through no fault of their own have lost jobs they’ve had for years have to pay taxes. Meanwhile there are millions on welfare and food stamps for literally decades (I personally know 4 who have scammed their way for over 25 years get 6K – 8K REFUNDS every year?! No wonder this country is in BIG trouble. Hows about congress stop paying the welfare and food stamps for those who have abused the system for as long as they have and give all that money to the NEW POOR Unemployed instead of stiffing them like they just did the other daY?

      • guruinmt says:

        I have made the maximum EIC before and had other additions and have NEVER gotten close to $6K-8K in refunds.

        Sorry there is just no way for this to happen to a person on “welfare” which is really TANF which is primarily a work program which only has 60 months (5 years) of benefits since 2004.

        Without earned income you do not get any refund anyway. NONE.

        So basically I am calling bull on this post.

        Although I do agree that unemployment being taxed is sort of silly.

  2. Keith Morris says:

    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.

  3. zapeta says:

    I didn’t realize that unemployment benefits were taxed but I guess it makes sense because of how it’s funded.

  4. Shirley says:

    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?

  5. Great information to know. I am not currently or have been on unemployment, but you never know when that day could come…

  6. Tim says:

    I’m fine with unemployment being taxed. if not, then i think it should be repaid at a minimal interest rate.

  7. Ardith Richter says:

    hi, nope, this little bit that helps and Ed gets 215.00 once aweek for the 615.00 that he did make..just puts us in a higher income tax bracket and i get to pay the higher if I make 17,000 plus eds 12,000, that makes us 29,000 for the year and that is a higher income taxable table for 2. as a temp they take out of my check for the year 483.00 on a fed level on a state they take out a 785.00..I do the math and I pay into the system an extra 2,500 Fed and state 850.00 for working 40 hours aweek.. wow someone could go on holiday with my monie..hahaaa not us..Iam 60 Ed has been harmed at work loss of shoulder neck and back is 5 years. yep the real world and the working poor. ardy richer milwaukee wi

  8. Hector says:

    Un-employment is taxed because it causes inflation and forces the individual to become a productive citizen.

  9. Dis7 says:

    Unemployment Compensation is not taxed because it is the result of jobs being imported overseas for slave labor. The direct cause of most unemployment in this nation is the importation of jobs.
    Worker suicide in China has grown proportionately higher due to Corporate America taking advantage of a Communist State worker abuse program. Now the tide is turning. Chinese wages are going up because of gov’t mandates in China and the slave work schedules are getting eased. Terrible news for the “great democracy”.
    This crud about comp being handed out freely is more statist fascist simplistic idiocy. We pay into it. It is not to be taxed at all.

    • freemarketer says:

      I believe you meant exportation of jobs. Actually exportation of jobs is the result not the cause. The reason jobs are exported is due to the disparity in the cost and burden to the employer between domestic and foreign labor. Employers would prefer to keep jobs at home but we have made that burden and cost too high relative to the alternatives which include layoffs and outsourced foreign labor. It is just basic economics.

  10. N/a says:

    I don’t think that unemployment should be taxed. When you’re working you get taxed and pay into unemployment. They only figure at quarter of what you made that year and give you that amount for the time they estimate that you should find work. With the taxes taken out I can’t even afford to pay my bills. How am I suppose to live? I didn’t lose my job because of anything reckless. I’ve been unemployed over a month now and its horrible to live. It wasn’t my choice to be unemployed and live like I can’t. Finding jobs is horrible too. It’s not fair everything has to be taxed. It’s terrible.

    • Tracey says:

      You don’t pay into unemployment, the employer pays into unemployment. Why do you think they work so hard to keep people from getting it if they when they were terminated due to costs? If if was your money they wouldn’t care.

  11. Terry says:

    I do not understand the part about the first $2400 being tax free. Where is that figured on a tax return? If my entire amount of unemployment compensation gets included in gross income, where does the $2400 exemption come off that total? I elected to have income tax withheld and still have to pay this year. It is terrible.

    • Tracey says:

      It’s automatic on yoru tax return. You don’t start getting taxed until $2401. So if you made $3000 in unemployment benefits only $6000 is taxable.

  12. Tracey says:

    I personally don’t believe that unemployment benefits should be taxed, but i can see how it is different from food stamps adn housing subsidy. Unemploymnet benefits are cash in hand to spend any way you choose. Food stamps can only be spent on certain food items and housing subsidy is where the housing is located, it can’t be moved and can’t be converted to cash to use in any specific way. However, I think that if unemployment benefits were not taxable, there also wouldn’t be any extensions.

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