In most cases, you need to file a tax return whether you were unemployed for only part of the year or the entire year. Although you weren’t working, the IRS considers unemployment compensation as wage income. While the government doesn't automatically withhold taxes from your unemployment income, you are responsible for following IRS rules for reporting and paying taxes on the unemployment benefits you receive.
Unemployment Income Taxable
When filing your tax return, you must include in your gross income any state unemployment insurance benefits you receive during the year. Unemployment payments are less than the normal wages you earn; therefore, the reduction in your income could put you in a lower tax bracket reducing your tax liability. While all unemployment income is taxable, having a lower income may qualify you for more tax credits and deductions.
If you choose to itemize deductions on your federal tax return, you may qualify to deduct expenses related to your search for a new job. Deduct any job search expenses as miscellaneous itemized deductions on Schedule A, Form 1040. In addition to travel expenses, you can include costs associated with preparing your resume. You must look for work in the same field to be eligible to deduct allowable job search expenses.
Your state’s Department of Labor and Employment will mail you Form 1099-G if you received any amount of unemployment benefits during the year. The form shows the total amount of benefits you were paid in box 1. Unemployment compensation includes Railroad Retirement Board payments. If you elect voluntary federal withholding on unemployment compensation you receive, the amount is reported on Form 1099-G. You may also choose to have state income tax withheld if your state taxes unemployment benefits.
Although no tax is withheld from unemployment compensation benefits, you can request that 10 percent of your unemployment be withheld for federal income taxes. Use Form W4-V to request voluntary withholding and then return it to your state unemployment office. You also have the option of making quarterly estimated tax payments on the unemployment benefits you receive. If you don’t voluntarily have federal income tax withheld or make quarterly estimated tax payments, you must pay the amount of tax you owe when you file your tax return plus any penalties. You must complete an updated Form W4-V if you decide to stop federal withholding on your unemployment insurance payments.
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