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Are My Unemployment Checks Taxable?

by
Spencer Wilson
on
12/29/2021
Are My Unemployment Checks Taxable?

In response to the global pandemic, businesses all around the country shut down or severely cut back on payroll through layoffs and furloughs. If you lost your job, the American Rescue Plan provided a real lifeline, extending Pandemic Unemployment Assistance benefits of $300 a week through September 6, 2021 and increasing the total number of weeks benefits were available from 50 to 79. Notably, the plan also made the first $10,200 in 2020 unemployment benefits tax-free for families that made $150,000 or less and allowed those who'd had taxes withheld in 2020 eligible for a refund via an amended tax return or when they filed their 2020 taxes. And this highlighted something that many who were new to unemployment may not have been aware of: unemployment benefits are taxable.

Unemployment Benefits are Taxable for Federal and State Income Tax with Some Exceptions

Nine states have no state income tax including Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.  In addition, the following states specifically exempt unemployment from income tax: Alabama, Arkansas, California, District of Columbia, Montana, New Jersey, Pennsylvania, and Virginia.  The remaining states tax unemployment in one form or another.  

Though you don't have to pay into Medicare or Social Security when you're receiving unemployment, that does not mean that you can evade federal income tax, and the same is true for state taxes unless you live in one of the few states that either has no income tax at all or that have never taxed unemployment benefits.  Not realizing or planning for these taxes can leave you with a big, unpleasant surprise when tax time rolls around.

How to Manage Your Unemployment Income Tax Problem

The simplest way to avoid having to pay all of your unemployment taxes at once is to request that taxes be withheld from each check that you receive. This can be done at any point when you are receiving benefits, including during your required check-in with unemployment. Just as is true when your employer withholds your federal and state income taxes, withholding allows you to pay your taxes ahead of time in small increments rather than having to pay a lump sum when you file your tax return.  You also have the option of submitting tax payments on a quarterly basis, or if you find a new job and start receiving wages you may be able to apply an Earned Income Tax Credit to your shortfall.

If your unemployment benefits income liability represents a significant burden, you may be able to arrange for a payment plan with the IRS and your state tax office.

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Spencer Wilson

Spencer Wilson

Spencer Wilson, EA is a tax preparer based in Long Beach, CA. Spencer Wilson Financial Management Services has been serving the Greater Los Angeles Area and Orange County since 2004. <br /> We began in the heart of Naples in Long Beach and we continue to work hard offering tax preparation and planning, business accounting and bookkeeping and payroll services . <br /> We have helped many different people and businesses succeed financially and take control over their finances.

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