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Unemployment Compensation Is Taxable?

Yikes!! It’s taxable??

Did you know that unemployment compensation is taxable? That might come as a surprise to many people who are receiving these payments for the first time.

By law, unemployment compensation is taxable and must be reported on a 2020 federal income tax return. Taxable benefits include any of the special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted this spring.

To help avoid owing taxes on this income when you file your federal income tax return next year, recipients of unemployment compensation can have tax withheld from their benefits now. To do that, fill out  Form W-4V, Voluntary Withholding Request (PDF), and give it to the state or federal agency paying the benefits. Don’t send it to the IRS.

It is probably a good idea, if you can afford it. Otherwise, tax time next spring may be pretty painful – especially if you go back to work at some point this year. Beneficiaries who return to work before the end of the year can use the IRS Tax Withholding Estimator to make sure they are having enough tax taken out of their pay. This online tool can help any worker or pension recipient estimate their year-end tax bill or the refund they might receive.

In January 2021, beneficiaries should receive a Form 1099-G, Certain Government Payments (PDF) from the agency paying the benefits. The form will show the amount of unemployment compensation they received during 2020 in Box 1, and any federal income tax withheld in Box 4. Taxpayers report this information, along with their other income, on their 2020 federal tax return.

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