If you received unemployment compensation benefits in 2014, you must report this to the IRS, as it is considered to be fully taxable income.
• Briefly describes unemployment compensation benefits.
• Explains how to declare unemployment compensation at tax time.
• Suggests a way to avoid owing taxes on unemployment benefits.
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Unemployment compensation is money you receive from a state or federal unemployment benefits program. Unemployment compensation is not the same as severance pay or worker's compensation, which is paid by your employer.
Unemployment compensation is not considered earned income and should not be reported with your wages and salaries. It is, however, taxable income.
If you have received any unemployment benefits from an unemployment program you will receive a 1099-G. Your total unemployment compensation for the year is located in Box 1. You need to pay taxes on the entire amount at the same rate as regular taxable income wages.
Generally, you enter unemployment compensation on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ.
In order to prepare for the extra tax you may be subject to, you should withhold 15% of your unemployment benefits.
Although this seems rather unappealing, especially when the money is short already, this is a good measure to take, so that when tax time rolls around you won't find yourself having to pay taxes on this taxable income and no money to do so.
By filing a W-4V with your unemployment benefits program, you can request that 15% be withheld. This way you will be able to afford your required tax payments come April 15th.
If you repaid any amount of unemployment compensation benefits in 2014, you do not need to pay tax on what you repaid (logically). Simply subtract the amount you repaid from the total benefits you received, and use enter that amount on the appropriate form you are filing.
Often those who declare unemployment benefits also have other factors complicating their returns, such as multiple W-2s, disability payments, and others.
In order to ensure that you reporting the correct taxable income amounts, you should use an online filing program.
You'll save time and hassle, and avoid costly mistakes. But perhaps most importantly, you'll get your refund much faster, if you are entitled to receive one.
You can e-file online with TurboTax, where you'll have the option of asking for professional tax help, should you need it. Either way, you'll be able to work on your tax return for free until you actually decide to file.
You can get more information about taxable unemployment benefits directly from the IRS, in the form of Publication 525
If you'd like to withhold 15% of your unemployment benefits during the year, and avoid owing money to the IRS in April, you can file Form W-4V with your unemployment benefits agency.