Can I Still Collect Unemployment Benefits If I Got Money Back on My Tax Return?

That tax refund can help you through a jobless stint and should not affect your unemployment benefits.

That tax refund can help you through a jobless stint and should not affect your unemployment benefits.

When you’re looking for work, every little bit of money counts. You were grateful to receive your income tax refund, but will that end up affecting your unemployment benefits?

Tip

A tax refund will not affect your unemployment benefits.

Unemployment Benefits and a Tax Refund

When you receive a refund, you are not getting “extra” money, although it seems that way. In reality, when you receive a refund, it means that you were letting your employer take too much of your salary or wages for withholding and in effect giving the government an interest-free loan. Of course, it’s different when you’ve been laid off, since your former employer’s payroll department calculates your withholding based on your annual income, and a potential layoff isn’t part of the calculation. That means you’re likely to receive a larger than average tax refund when you have been out of work for a while.

When you find another job, adjust your withholding so you don’t end up getting a lot of money back after filing your tax return. Instead, your paycheck will include a bit more money no matter whether you’re paid weekly, bi-weekly or monthly. A tax refund will also not affect potential Medicaid or Social Security benefits if you decide to retire rather than continue looking for work. The government does not consider such tax refunds as income for at least one year for these purposes.

Private Unemployment Income

If you receive unemployment compensation from a private fund to which you contributed voluntarily, such benefits are not taxable unless you receive more money than you contributed. The IRS does not consider this unemployment compensation per se, and you must report it as “other income” on your tax return. The same holds true for supplemental unemployment benefits from your former company’s fund. The IRS considers such benefits to be wages and taxes them accordingly. Your prior employer should withhold taxes on these supplemental unemployment benefits, just as they did your wages. You’ll also need to check and see whether your state taxes unemployment benefits, as some do and some don’t.

Does Unemployment Count as Income?

Whether unemployment counts as income depends on the type of unemployment compensation. Unemployment compensation includes state benefits paid via the Federal Unemployment Trust Fund, and this counts as income for which you must pay taxes. You can choose to make quarterly estimated tax payments on such unemployment income or have federal income tax withheld. You’ll receive Form 1099-G, which shows the amount of unemployment income paid. If you want to have income tax withheld from your unemployment, request the payer to withhold the amount by submitting Form W-4V.

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About the Author

A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.

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