Unemployment Income: What to know about unemployment income if you've been laid off or furloughed

As the U.S. economy continues to rapidly deteriorate, approximately 17 million Americans have filed for unemployment in the past four weeks. Just last week alone, approximately 6.6 million Americans filed unemployment claims. I expect these unprecedented times to continue as the worldwide economic shutdown continues with no end in sight.

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In response to the pandemic and related economic shutdown, the U.S. government passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act expanded unemployment benefit relief. Namely, the CARES Act expanded the unemployment eligibility definition and increased the unemployment benefit by $600 per week for four months.

Because of the increase in unemployment claims, it is important for U.S. taxpayers to understand the tax rules surrounding unemployment benefits. Below, I will detail the tax implications of receiving unemployment income as well as share some tax tips for those U.S. taxpayers now eligible for unemployment income.

Unemployment Income Tax Rules: How is unemployment income taxed?

Unfortunately, unemployment income is taxable. For a complete list of taxable income items, please see The Guide to Taxable Income versus Nontaxable Income. You should include in your total income any unemployment income you received during the year. States have different rules relating to unemployment income, and so, please apply the applicable state tax rules regarding unemployment income and benefits.

Before filing your federal income tax return, you should receive a Form 1099-G. The Form 1099-G reports the total amount of unemployment income you received during the year. Additionally, the Form 1099-G shows the amount of federal taxes withheld from your unemployment income payments. You should use the Form 1099-G to report the correct amount of unemployment income on your federal income tax return.

Tax Tips for Those Receiving Unemployment Income

If you are receiving or are expecting to receive unemployment income, you should know the following tax tips regarding unemployment income.

Unemployment Income Tax Tip #1: Elect automatic federal tax withholding

Because unemployment income is taxable, you must plan to have the necessary funds to pay your related tax bill when filing your federal income tax return. Unlike a paycheck from an employer, unemployment compensation does not have taxes withheld from the amount. However, you may voluntarily elect to have federal taxes withheld from your unemployment income. To do so, file the Form W-4Z, which notifies the unemployment payer that you wish to have taxes withheld from your unemployment checks. This is the easiest way to budget and plan for your year-end taxes related to unemployment income.

Unemployment Income Tax Tip #2: Pay estimated taxes throughout the year

If you choose not to elect for automatic tax withholding, you must remember to pay estimated taxes during the year related to your unemployment income. You should pay estimated taxes quarterly based on net income, which should include any unemployment income you receive during the year. You can use the Form 1040-ES found on the IRS website to calculate the estimated tax payments relating to your income. To avoid interests and penalties, you should pay estimated taxes on all your income not subject to federal tax withholding, which includes unemployment income.

Unemployment Income Tax Tip #3: Claim additional tax credits and tax deductions

Because many tax credits and tax deductions utilize an income threshold, you may now be eligible for additional tax credits and tax deductions. Take advantage of these tax credits and tax deductions on your federal tax return. For a list of federal tax credits, please see The Complete List of Tax Credits for Individuals. The credits and deductions will help you save money during these difficult times.

I hope this helped you learn about the tax rules surrounding unemployment income. Additionally, I hope the unemployment income tax tips will prove helpful. Please share with others to help them understand the tax implications of receiving unemployment income. For any and all questions and concerns, please comment below or reach me via my contact page.