Taxes 2023: Tips for Handling Unemployment Benefits

That figure seems worrying.
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If you received unemployment benefits in 2022, you’ll have to declare them when you file your taxes. It may seem like a cruel trick to some, but if you lose your job and successfully file for unemployment, you’ll usually have to pay taxes on the money you get.

If you still don’t have a job by the time you file your return, it might be difficult to come up with the cash to pay your taxes, so you should plan ahead as best you can the moment you begin receiving your benefits. As the tax deadline approaches in 2023, here’s what you should know about unemployment benefits and taxes.

Benefits Are Federally Taxable

From the perspective of the federal government, your unemployment benefits are the same as your wages. Unemployment payouts are funded by taxes paid by employers.

When this money is paid out to an unemployed worker, it is meant to be a substitute for wages. Thus, unemployment benefits are considered a type of income, and they are subject to federal income tax in the same way that your ordinary paycheck would be.

However, You May Catch a Break on Your State Taxes

The unfortunate truth is that most states do indeed tax unemployment benefits, just like the federal government. However, some states have no income tax, meaning your unemployment benefits will remain untaxed as well. A few other states simply choose not to tax unemployment benefits, while others tax only a portion.

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Alaska, for example, doesn’t have a state tax and therefore doesn’t tax unemployment benefits. But even though Alabama does have a state income tax, unemployment benefits remain untaxed. Indiana taxes unemployment benefits, but a portion may be deductible.

You’ll have to consult with your tax advisor or your state’s taxing authority to find out the law that applies in your state.

You Can Choose To Have Some Taxes Withheld

In order to avoid any nasty surprises at tax time, you can choose to withhold taxes from your unemployment checks. If you so choose, federal law allows you to withhold 10% of your unemployment compensation to cover some or all of your taxes.

It’s important to note that if you do decide to withhold taxes from your check, you should file Form W-4V with the agency paying your benefits, not the IRS. Another option is to pay quarterly estimated taxes, just as a self-employed individual would.

Look for Your Form 1099-G

To be sure that you’re paying the correct amount of tax, look for Form 1099-G in the mail from your state taxing authority. Typically, tax forms like 1099-G are mailed on or about Jan. 31 of the year following when you received benefits. Box 1 of Form 1099-G will show the total unemployment compensation paid to you, which is what you’ll have to report on your taxes.

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Note that in some states, like California, your entire unemployment benefit program is accessible online. This means that you can log on to a site run by the state and access all the information about your unemployment benefits, including tax forms like your 1099-G. Check with your state to see if you can get electronic copies of your 1099-G, especially if you haven’t received it in the mail by February.

Note: Things Have Changed Since 2020

When the devastating initial effects of the coronavirus triggered many businesses to close their doors in 2020, the unemployment rate spiked. Many Americans who had never been on out of work before found themselves drawing unemployment checks for the first time.

If you were one of the many Americans who received unemployment compensation in 2020, it’s important to realize that the taxation of unemployment benefits was suspended for that year only. Special legislation allowed Americans to exempt up to $10,200 of their unemployment compensation from taxation.

However, that policy was not extended into 2021. For tax year 2022 and the foreseeable future, the taxation of unemployment benefits has returned.

The Bottom Line

As tax season starts to heat up, it’s time to get all of your documentation in order, particularly if you received unemployment compensation in 2022. Look for Form 1099-G in the mail or via electronic delivery and be prepared to pay taxes on your unemployment benefits, just as if they were regular income.

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Be sure to verify whether or not you’ll owe state taxes on those payments as well.

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