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Taxes on Unemployment Benefits

Unemployed man in tie holding signTaxes on unemployment benefits may seem like a double-whammy for someone who has lost their job or can’t find work, but the benefits are considered taxable income and are subject to federal and state taxes.

There are different types of unemployment benefits paid under either federal or state law, but both are taxable as income and may also be subject to withholding.

Union benefits to unemployed workers may also be taxable including benefits paid from regular union dues. Some unions provide special fund contributions that are not deductible, but when unemployment benefits are paid out of that fund, only the portion that is above what the worker paid into the fund is considered to be taxable income.

To ensure the proper amount of tax is withheld, a taxpayer can file a Voluntary Withholding Request to have federal income tax withheld from unemployment checks.  The worker may also make estimated tax payments during the year to avoid penalties.

There are a few options to help if a taxpayer is struggling financially.  If income has decreased from the previous year, he or she may qualify for certain tax credits.  If a taxpayer cannot pay federal income taxes owed, there are some steps to take to ease the burden, but nevertheless, remember a tax return must be filed to avoid penalties.

For more information, review the IRS’ online information, “What Ifs” for Struggling Taxpayers.


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