Special Tax Treatment of Your Unemployment Benefits

Tax Treatment of Unemployment Benefits. A record number of people are currently receiving unemployment benefits. These unemployment benefits receive special treatment when it is time for you to file your income tax return. The tax treatment of unemployment benefits you receive depends on the type of program paying the benefits.

Unemployment Compensation. All unemployment compensation you receive must be included in income. The total unemployment compensation paid to you should be reported to you in box 1 of Form 1099-G. If you receive unemployment compensation you are given the opportunity to have federal income taxes withheld at 10% of your payment. To have taxes withheld, please refer to Form W-4V, Voluntary Withholding Request, http://www.irs.gov/pub/irs-pdf/fw4v.pdf. If you do not have federal income tax withheld, you may be required to make quarterly estimated tax payments. 

Types of Unemployment Compensation. Unemployment compensation generally includes any amount received under an unemployment compensation law of the United States or of a state. It includes the following benefits: Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund State unemployment insurance benefits Railroad unemployment compensation benefits Disability payments from a government program paid as a substitute for unemployment compensation (Amounts received as workers compensation for injuries or illness are not unemployment compensation) Trade readjustment allowances under the Trade Act of 1974 Unemployment assistance under the Disaster Relief and Emergency Assistance Act 

Repayment of Unemployment Compensation. If you repaid unemployment compensation that you received in that same year, the amount you repaid can be deducted from the total amount you received. If you repaid unemployment compensation that you included in income in an earlier year, you can deduct the amount repaid if you itemize deductions. If the amount repaid is more than $3,000, you may generally be able to take a credit against your tax for the year in which you repaid it. 

Supplemental Unemployment Benefits. If you receive supplemental unemployment benefits from an employer-financed fund (to which the employees did not contribute), do not include them as unemployment compensation. These benefits are taxable as wages and are subject to withholding for income tax. They may also be subject to social security and Medicare taxes. 

Repayment of Benefits. If you repay supplemental unemployment benefits in the same year you receive them, deduct the amount you repay from the total benefits you received. If you repay the benefits in a later year, you must include in income the full amount of the benefits you received in the year you received them and deduct the repayment in the later year as an adjustment to gross income. If the amount you repay in a later year is more than $3,000, you may be able to take a credit against your tax for the later year. 

Private Unemployment Fund. Payments you receive from a private (nonunion) fund to which you voluntarily contribute are taxable only if the amounts you receive are more than you total payments in to the fund. 

Payments by a Union. Benefits paid to you as an unemployed member of a union from regular union dues are taxable as income. However, if you contribute to a special union fund and your payments to the fund are not deductible, only the amount of the unemployment benefits you receive that are more than your contributions are taxable. 

Guaranteed Annual Wage. If you are under a union agreement that guarantees you full pay during the year, any benefits you receive from your employer during periods of unemployment are taxable as wages. 

Your tax preparer can provide you with more information regarding the treatment of unemployment benefits on your income tax return. StrataTax, a San Diego consulting and tax services firm, is available year-round to assist you with income tax preparation and tax planning.  Call us at (858) 225-7720 to setup your free initial consultation or visit us at www.StrataTax.com for more information.

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Tax Tip: A record number of people are currently receiving unemployment benefits. These unemployment benefits receive special treatment when it is time for you to file your income tax return. The tax treatment of unemployment benefits you receive depends on the type of program paying the benefits. 

Source: http://www.irs.gov/publications/p525/ar02.html#en_US_2010_publink1000229464