If you lose your job, you may qualify for unemployment benefits.
The payments may serve as much needed relief.
But did you know unemployment benefits are taxable?
Here are five key facts about unemployment compensation:
1. Unemployment is taxable. You must include all unemployment compensation as income for the year. If you received unemployment in 2014 you should receive a Form 1099-G from the state that paid you by February 2, 2015. This form shows the amount paid to you and any federal income tax withheld.
2. Unemployment is paid under U.S. or state law. There are various types of unemployment compensation. Unemployment includes amounts paid under U.S. or state unemployment compensation laws.
3. Union benefits may be taxable. You must include benefits paid to you from regular union dues in your income. Other rules may apply if you contributed to a special union fund and those contributions are not deductible. In that case, you only include as income any amount that you got that was more than the contributions you made.
4. You may have tax withheld. You can choose to have federal income tax withheld from your unemployment. You can have this done using Form W-4V, Voluntary Withholding Request. Most people don’t do this, and pay taxes owed when they file their tax return.
5. Visit IRS.gov for help. If you’re facing financial difficulties, you should visit the IRS.gov page:“What Ifs” for Struggling Taxpayers. This page explains the tax effect of events such as job loss. For example, if your income decreased, you may be eligible for certain tax credits, like the Earned Income Tax Credit. If you owe federal taxes and can’t pay your bill, contact the IRS. In many cases, the IRS can take steps to help ease your financial burden.
IRS makes it sound more complicated than it is. We ask you all the right questions, put the numbers in the right places, and do the math so you get the biggest refund possible.
Bill Hendricks is the CEO and co-founder of Common Form, which helps people with simple finances file taxes in 5 minutes from their phone or computer.