it's true. Your unemployment benefits are taxable.
Under tax law, unemployment
is considered wage income and the IRS wants a cut of every
type of income you collect.
Now that you're over
the shock and anger, what can you do?
If you get laid off,
when you apply for unemployment benefits consider having federal
income taxes withheld. This process is similar to the payroll
withholding you encounter when you collect a paycheck. In
this case, the form you fill out is the federal W-4V, Voluntary
Withholding Request, or a similar, IRS-acceptable document
that the paying agency has created. This way, taxes will be
withheld at the rate of 10 percent of each unemployment payment.
However, since unemployment
compensation is usually less (and sometimes a lot less) than
your former paycheck, most people decide against having taxes
withheld. This means you get your full unemployment check
to use toward day-to-day expenses. But it also means you'll
owe the IRS when you file your next income tax return.
You can avoid a big lump-sum
tax bill on April 15 by paying quarterly estimated taxes on
your unemployment income. Find out how to figure and file
estimated taxes in this Bankrate story.
And for help on managing your finances and taxes after getting
a pink slip, check out this Bankrate article.
Text by Kay
illustrations by Brandy Kesl.