Taxation of Unemployment BenefitsTaxation of Unemployment Benefits

With so many people receiving unemployment benefits during the past two years, many are concerned about the taxation of unemployment benefits. In this article, we will go over the basics regarding the taxation of unemployment benefits.

What Is Taxable

All the unemployment benefits you receive are includable in your gross income. This means all benefits you receive are taxable as ordinary income. However, unemployment benefits are not subject to Social Security or Medicare tax withholding.

American Rescue Plan Act of 2021

The American Rescue Plan Act of 2021 enacted changes to the taxation of unemployment benefits for the 2020 tax year. This act reduces the number of unemployment benefits you may be eligible for. To qualify, whether single or married, your adjusted gross income must be less than $150,000. If your income falls below this amount you can exclude $10,200 of unemployment income. This exclusion qualifies per person if you are married filing jointly. The IRS has yet to release whether this will apply to the 2021 tax year as well.

Withholding Taxes

If you think that you will owe taxes on your unemployment benefits, there is a preemptive measure you can take. You can file the IRS Form W4-V with your state unemployment agency. This form states you want to withhold 10% of your unemployment benefits for federal taxes. By prepaying these taxes, you prevent a surprise tax bill at the end of the year and potential penalties.

What to Look For

If you were the recipient of unemployment benefits during the year, how do you know the total amount you were paid? Your state unemployment agency will mail you a Form 1099-G. This will detail the total unemployment compensation received for the year. Your state agency will also file a copy of this form with the IRS to cross-check your records when you file your taxes.

Planning Ahead

If you are worried about the taxation of unemployment benefits for the 2021 tax year, you should plan now. Contact your tax preparer for a review to ensure you will not be hit by a surprise tax bill.

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