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.
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.