Do I Have to File Unemployment Income Benefits on My Taxes?

Many taxpayers operate under the misconception that unemployment benefits do not count as income. Unfortunately, this is not true. With only a few notable exceptions, unemployment benefits are treated as income by the Internal Revenue Service.

Types

Unemployment compensation includes state-administered benefits, disability payments administered by the government as a substitute for unemployment benefits (this does not include workers' compensation) and trade readjustment allowances.

Taxability

Unemployment compensation is taxable and should be included in your gross income. The only exception is for unemployment you received from a fund to which you contributed.

Filing

Use the 1099-G you receive in the mail to determine your total amount of unemployment compensation. Report unemployment income on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ. You can submit your tax form electronically or you can mail it to your local IRS processing center. If you complete an electronic return, allow 10 days for processing; if you file by mail, allow six to eight weeks.

Withholding

If you don't want to take the chance that you will owe tax on your unemployment benefits, you can have tax withheld from your benefit payments. To do this, complete IRS Form W-4V, Voluntary Withholding Request, and take it to your unemployment office. Once the change is input, tax will be withheld at a rate of 10 percent of your payment. In addition, many state offices allow you to have tax withheld when you apply for benefits.

Exceptions

For tax year 2009, the first $2,400 of unemployment compensation was tax-free. This exception was written into the American Recovery and Reinvestment Act. The exception was put in place to help Americans who had been laid off or otherwise displaced during the recession. For married filers, the exclusion applies to each spouse separately.

References

• Internal Revenue Service: Publication 525
• Internal Revenue Service: First $2400 of Unemployment Benefits Tax Free for 2009
• Internal Revenue Service: Unemployment Compensation