December 2, 2014

In the difficult economy of the past six or seven years, many people have lost their jobs. Unfortunately for these people, if they qualify for unemployment benefits, they learn the harsh reality that these benefits are taxable and are included in their adjusted gross incomes.

The federal government changed the rules slightly in 2009 when so many people were losing their jobs. It excluded the first $2,400 of unemployment compensation from gross income, therefore making it nontaxable. This was a one-time change to the rule and is no longer still in effect.

Effective for tax years 2010 and thereafter, all of the unemployment compensation is taxable.

Unemployment compensation is not subject to income tax withholding. The person receiving the unemployment compensation may request that federal income tax be withheld at the rate of 10 percent.

They can also request that state income taxes be withheld. State laws have to permit these voluntary withholding amounts.

Payees must request in writing that the payer withhold taxes from their checks. The easiest way to do this is by filling out Form W-4V, Voluntary Withholding Request, or a similar form provided by the payer.

Many people may assume that unemployment compensation is a benefit from the state where their place of employment was located. But there are many other types of unemployment compensation programs, including:

1. State unemployment compensation under programs approved by the US Secretary of Labor. This is the program that most people are probably familiar with and receive benefits from.

2. A federal unemployment program for federal employees and members of the military.

3. Benefits under the Trade Act of 1974.

4. Federal disaster relief assistance under the Disaster Relief Act of 1974.

5. Allowances under the Airline Deregulation Act of 1978.

6. Railroad Unemployment Insurance Act.

7. Government disability programs.

As you can see, there are many different types of unemployment compensation programs. Regardless of the program, the money received is taxable income and fully includable in gross income.

This article was originally posted on December 2, 2014 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at