Specifically, people want to know whether those unemployment benefits are taxable.
The simple answer is "Yes," according to the IRS. But depending on where you live, things could get a little more complex.
The money you receive through state-sponsored unemployment insurance is considered taxable income and must be reported to the federal government. Depending on how much you earn during the year in which you receive the benefits, you could owe federal tax on them.
This applies to money you get through your state-administered unemployment program and the additional $600 weekly stipend some people are receiving from the federal government through the CARES Act.
Most states also tax unemployment benefits. The ones that don't, according to the Tax Foundation, are:
- New Jersey
Some other states — Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming — have no state income tax, so your unemployment benefits wouldn't be subject to state tax in those states either.
If you live in a state not listed above, you will likely owe state income taxes on your unemployment benefits.
Since you'll be receiving unemployment compensation during the year, you should get a Form 1099-G from the federal government. This will show the total amount of unemployment benefits you were paid that year.
You must include all unemployment compensation as income when you file your federal taxes.
If you don't want to get hit with a bill when you pay your taxes next year, check with your local unemployment office to see if it's possible to have federal and/or state withholding taken out of your unemployment checks.
That way, you won’t have to come out of pocket at tax time.
You can also request that the federal government do this by filing form Form W-4V, which is a Voluntary Withholding Request for payments coming from the government.
A final option is to pay estimated quarterly taxes on your unemployment benefits. This is a little more complicated, but if you had been self-employed or owned your own small business you may already be used to it. If you've never paid estimated taxes before, you'll probably be better off going the withholding route.
Unemployment insurance and the additional funds coming from the government through the CARES Act are helpful in bridging that gap between jobs. But remember to make sure you’re accounting for the taxes you owe on that money so you don’t suffer from sticker shock with it’s time to file next year.