Folks without jobs got a tiny bit of good news from Capitol Hill today. The Senate agreed to move forward on consideration of a $6.4 billion plan to extend unemployment insurance benefits to some out-of-work individuals for another three months.
The Senate must now vote to approve the unemployment payments. The bill then would go to the House, where its approval is much less certain.
The 1.3 million unemployed folks no doubt would welcome some added money as they look for full-time jobs. But they also need to be aware that any unemployment benefits they got last year or might receive in 2014 are considered taxable income.
That’s right. Unemployment compensation must be counted when you file a tax return. This generally includes any amounts paid out under U.S. and state unemployment compensation laws.
Reporting unemployment income
Don’t ignore it. You should get Form 1099-G, Certain Government Payments, showing the amount of unemployment you were paid. That official income notification is copied to the Internal Revenue Service.
The three individual tax return forms also specifically account for unemployment compensation. You report the unemployment amounts on line 19 of Form 1040, line 13 of Form 1040A or line 3 of Form 1040EZ.
You also have the option to have federal taxes withheld from your unemployment benefits. The withholding rate is 10 percent.
You also can choose to cover the tax on unemployment payments through estimated tax payments.
If you find that you can’t spare any of your unemployment for the tax man while you’re getting it or soon thereafter via Form 1040-ES filings, you’ll face the tax bill and possible penalties for not paying the tax in a timely manner when you file your annual tax return.
The tax bottom line is that Uncle Sam is going to take a bite out of the money you get from him when you’re not getting any money from anyone else.
More tax info from Bankrate
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Veteran contributing editor Kay Bell is the author of the book “The Truth About Paying Fewer Taxes” and co-author of the e-book “Future Millionaires’ Guidebook.”