Unemployment Wages & Claiming Taxes
With national unemployment rates topping 10 percent and some states with even higher percentages of unemployed workers, many Americans are collecting unemployment wages. Come tax time, how to handle this compensation can cause confusion. Following IRS and state guidelines for filing tax returns when unemployed can prevent serious financial problems in the future.
Other People Are Reading
-
Types
-
Unemployment wages include benefits paid by regular state programs, federal extended benefit program, trade readjustment allowance benefits and disaster unemployment assistance benefits. Under federal tax law, unemployment wages are considered earned income which is taxable. In addition to federal tax requirements on unemployment wages, depending on the location of the claimant, state and city income taxes might also apply.
Features
-
In 2009, as part of the American Recovery and Reinvestment Act, the IRS exempted Americans from paying federal tax on the first $2,400 of unemployment wages. For married couples, this exemption applies to both individuals, thus a total of $4,800 of the combined income would not be subjected to federal tax. However, this exemption does not apply to any other year during which unemployment wages were earned.
-
Prevention/Solution
-
Paying quarterly estimated federal taxes on unemployment wages can help to avoid paying a lump sum tax bill. Another option for preventing owing a large amount of taxes involves completing the federal W-4v, which is a voluntary withholding request that deducts 10 percent of the unemployment wages for federal taxes. To calculate and pay estimated quarterly taxes on unemployment wages to the IRS, use federal Form 1040-ES, Estimated Tax for Individuals.
Considerations
-
People living on unemployment wages might not have funds available to set aside for estimated quarterly taxes. In addition, the amount of the unemployment wages might not be enough to live on, let alone have an additional 10 percent for federal taxes plus more for state or city taxes withheld. Staff at the IRS and state unemployment agencies can provide individualized assistance and information on payment options so that tax deadlines are met.
Warning
-
People who live in states and cities with income taxes should contact their state and city departments of taxation for information on paying quarterly estimated taxes on their unemployment wages to avoid owing a large amount at the tax return filing deadline; some states require quarterly estimated payments if the amount of tax owed is at least $400. Failing to report unemployment wages on an annual tax return could result in legal actions by the IRS and any other government agencies to which taxes are owed. This might include owing penalty fees and interest on the amount of unpaid tax.
-
References
Resources
- Photo Credit tax forms image by Chad McDermott from Fotolia.com
