Beware! – Tax Consequences of Unemployment Benefits

Many people are surprised at this time of year when they prepare their federal tax returns and realize that the unemployment benefits they received are considered taxable income.  For many people, this can make the difference between a refund and a balance due.

Unfortunately, unemployment benefits are generally taxable to the recipient.  If you received taxable unemployment benefits in 2011, you should also receive a form 1099-G with the amount of taxable benefits reflected in box 1.

Recipients of unemployment compensation can elect to have federal taxes withheld from their benefit payments by completing a form W-4V, Voluntary Withholding Request, and giving it to the paying office.  However, most people are either unaware of this option, or choose not to have taxes withheld.  This is usually because they are already struggling with the reduction of income that they are experiencing because their unemployment benefits are significantly less than the income they were earning at their former job.

For more information on the tax consequences of unemployment compensation, see Publication 17 and Publication 525.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.