Going through a job loss can be incredibly stressful. Taxes aren’t likely to be top of mind as you overcome financial hardship.
However, unemployment income is subject to federal taxation.
As you handle this stressful financial time, know that there are free tools to help you take control of your overall financial situation. Millions of people use Personal Capital’s powerful, online dashboard to see all of their financial accounts in one place and get clarity on their monthly cash flow, debt, and current savings.
For now, here’s how to navigate paying taxes on your unemployment compensation.
Unemployment Due to Coronavirus
Unemployment compensation must be reported as taxable income during the year in which it is received for federal and, in some cases, state income tax purposes. This includes special unemployment compensation that was part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that was passed in 2020, such as the $300 per week Federal Pandemic Unemployment Compensation (FPUC) that expired in September 2021.
If you received unemployment benefits at any time in 2021, you must report them on your 2021 federal income tax return. Note, however, that Social Security and Medicare taxes are not assessed on unemployment benefits — only income tax is assessed on the payouts. The 2020 unemployment compensation exclusion no longer applies.
You should have received Form 1099-G, Certain Government Payments, by January 31 listing how much money you received in unemployment benefits in 2021, along with any federal income tax that was withheld (see below). You’ll then report this information along with your W-2 income and other taxable sources of income this spring on your 2021 federal income tax return.
State Tax Considerations with Unemployment
In addition to the federal government, most states also tax unemployment benefits if they levy an overall income tax. The exceptions are Alabama, Arkansas, California, Montana, New Jersey, Pennsylvania, and Virginia. Indiana, Maryland, Massachusetts, and Wisconsin allow a partial exclusion of unemployment income when calculating income taxes.
Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming don’t collect any state income tax and therefore don’t tax unemployment income New Hampshire and Tennessee tax investment income, but not wage or unemployment income.
Are you ready to file your 2021 taxes? Learn everything you need to know in our Guide to Filing Your Taxes in 2021.
Should You Have Taxes Withheld?
To avoid having a big bill on Tax Day, you can choose to have 10% of your unemployment benefits withheld to cover all or part of your tax liability. Simply complete IRS Form W-4V, Voluntary Withholding Request, and send it to the state agency that’s paying your benefits. If you prefer, you can make quarterly estimated tax payments instead.
You might not need to have income tax withheld from your unemployment benefits, though. If you worked during most of the year and had income taxes withheld from these wages, you might not need to have more tax withheld from your benefits.
This is because your former employer calculated your income tax withholding as if you would earn the same amount of money for the entire year. However, your income likely went down when you lost your job and started receiving unemployment.
In this scenario, the money that was withheld from your wages might be enough to cover the income tax that’s due on your unemployment benefits. If you have income tax withheld from your unemployment benefits, this could result in you making extra income tax payments. You’ll eventually receive this money back in the form of a tax refund, but it might be better to keep the money in your own pocket now to help meet your current living expenses.
Unemployment Income Tax FAQs
Here are some common questions and answers related to taxation of unemployment benefits:
Q: Are unemployment benefits taxable?
A: Yes they are, at the federal and usually state level. How much tax you owe will depend on your tax bracket and your total taxable income, including any earned income you have.
Q: Can I have federal taxes withheld from my benefits?
A: Yes, you can have 10% of your unemployment benefits withheld to cover taxes. To do so, complete IRS Form W-4V and send it to the state agency you’re receiving unemployment benefits from.
Q: Could receiving unemployment benefits affect any tax credits I might be eligible for?
A: It’s possible that unemployment could affect your eligibility to receive the earned income tax credit (EITC) and the child tax credit or reduce the value of these credits. This is because unemployment benefits aren’t considered to be earned income.
The EITC is worth up to $6,728 for tax year 2021, depending on your filing status and how many qualifying children you have. Meanwhile, the child tax credit is worth up to $3,600 per child under age six at the end of 2021 and $3,000 per child age six to 17 at the end of 2021.
Next Steps for You
Taxation of unemployment benefits can be complicated. Talk to your tax advisor or financial planner for guidance on your specific situation.
Difficult financial times happen. You can prepare yourself to bounce back by getting a handle on your finances today. Personal Capital’s free personal finance tools can help you with all aspects of your financial life. You can:
Track your debt paydown
Analyze your investment accounts (and find hidden fees)
Create plans for long-term goals like retirement
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Author is not a client of Personal Capital Advisors Corporation and is compensated as a freelance writer.
The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. Compensation not to exceed $500. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.