Taxes On Benefits: Are Unemployment Insurance Benefits Taxable?

The Coronavirus outbreak has caused an unprecedented job loss and financial crisis. To provide the unemployed with temporary financial support, states pay unemployment insurance (UI) benefits to the claimants. There are a lot of questions concerning this financial aid, one being, are unemployment insurance benefits taxable? 

The answer is a big Yes. The federal government considers unemployment benefits as wages and subjects them to taxes. But, when it comes to state taxes, it depends solely on the state in which you live. Many states follow the federal rules and fully tax the UI benefits, while other states tax a portion of the benefits or don’t tax at all. 

How Do Unemployment Benefit Taxes Work?

Unemployment insurance benefits are subject to different types of taxes: Federal Tax, State Tax, and City Tax.

1. Federal Taxes On UI Benefits

The UI benefits are subject to federal tax. The state unemployment benefit office will provide you with a 1099-G form, which tells you how much of your benefit is taxed and what you will retain. If you have received the UI benefits through a SUB plan, then they will be included on your W-2 as regular wages. 

But if you received your benefits through a private fund, you only have to pay taxes on the received amount over your contributions and report it on Form 1040.

2. States Taxes

All states administer the unemployment insurance benefits, but not all of them subject the benefits to taxes. The states of California, Pennsylvania, Oregon, New Jersey, and Virginia do not subject UI benefits to taxes, whereas Indiana and Wisconsin require you to pay tax only on a portion of the benefit amount. 

States like New Hampshire, Nevada, Florida, Tennessee, South Dakota, Washington, Alaska, Wyoming, and Texas do not require you to pay taxes on the wages. 

But if you are not living in any of the above-listed states, then you must pay taxes on your unemployment benefits, just as you do for your federal income tax return. 

3. City Taxes 

Some cities of the United States have unique taxation requirements. Cincinnati, Detroit, Columbus, Cleveland, Kansas City, Toledo, and Louisville, require you to pay municipal taxes on your UI benefits.

How To File UI Benefits Taxes?

There is no separate process to file UI benefits taxes. Include the unemployment insurance benefits along with other reported incomes. But you have to requisition the following forms:

1. 1099-G

The state unemployment agency issues 1099-G form through a mail. The form identifies your Total Benefit Amount and the amount of federal taxes withheld the previous year if any. You need not attach this form to your federal income tax return but you may be required to for state income tax returns.

2. W-2

Your W-2 form should include your unemployment benefits, provided you have received them from a SUB plan. The W-2 form must be filed by your former employer, provided they employed you during that specific tax year. 

Stimulus Packages And Taxes 

Unemployment benefits are undoubtedly taxable but not the stimulus payments you are receiving during the Coronavirus pandemic. These payments are not considered as income but refundable income tax credit.

The stimulus packages are an advanced payment of a 2020 tax credit, that is calculated based on your 2018 or 2019 income. If your income was high in 2018 or 2019 but drops drastically within the adjusted 2020 gross income thresholds, you will qualify for the stimulus payment

Final Words 

Whether you can get financial aid or not, no one wants to lose their job. However, if you are facing such unfortunate situations, then file for unemployment insurance benefits. But make sure you avoid committing common mistakes that can lead to denial or delay of your benefits. 

 

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