How to Handle Unemployment Insurance for State and Federal Taxes

Should You Have Taxes Withheld From Unemployment Checks

If you are receiving unemployment benefits for the first time in your life, you may not realize that unemployment income is taxable. When you first file for unemployment benefits, you are given the option to have state and federal taxes withheld. Should you do it? Here is some advice on how to handle taxes on unemployment benefits.

Instructions

1. Have the taxes taken out now.
   Understand that unemployment benefits are taxable as regular income. That means that if you are receiving checks, you will owe taxes on it next year. So it's a good idea to go ahead and have the taxes taken out now to avoid owing them next April. However, you are still eligible for the $2400 tax free unemployment benefit which means you should remember to claim this deduction on your taxes next year.

2. Don't have the takes taken out now.
   If you know that you usually get a very large refund when you file your taxes, then it's ok to not have takes taken out of your unemployment checks. Please note though that this means you will get a much smaller refund than normal or possibly no refund at all.

   You should also consider this option if you absolutely cannot make ends meet on your unemployment checks. You will owe taxes later, but hopefully you will have a job by then.

3. Use a combination approach
   The best approach for most people is a combination approach. That's because the federal government passed a relief law which allows the first $2400 of unemployment benefits (earned in 2009) to be tax exempt. So you can start unemployment by not having taxes withheld and then once you meet the $2400 threshold, you can start having taxes withheld.

Tips & Warnings

• Your tax withholding for unemployment can be changed at any time using the State Department of Labor websites.