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Unemployment Benefits

Yes, 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.



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