Getting unemployment compensation usually puts you in a different financial situation. This includes your tax situation, which could be different depending on several of the following factors:
- Did you start getting unemployment compensation at the beginning of the tax year or later in the year?
- Do you have a spouse that has regular income?
- How much is your income going to the decrease this tax year?
Expect your tax return to look different this year, and figure out if you need to make any adjustments during the year to avoid tax problems in April.
Unemployment Compensation is Taxable Income
State or federal unemployment compensation is taxable income. You need to report on your tax return and you will have to pay income taxes on it unless your total earnings for the year are below the filing threshold.
Unemployment benefits won’t fully replace your old income, but that doesn’t necessarily mean you’ll get a big tax refund check. In fact, you could end up owing taxes when you are already in a tighter financial situation.
See if Withholding Adjustments are Needed
You have the option of having taxes withheld from your unemployment compensation. This can help you avoid surprises at tax time. Use Form W-4V to make this election.
Alternatively, you could make estimated tax payments. You only need to worry about either of these adjustments if your income (and your spouse’s if filing jointly) is going to be high enough for the tax year that you will owe the IRS money when you file your return.
If you’re filing jointly and your spouse is employed, he or she could choose to increase the tax withholdings on their paychecks. This could cover any tax liability from your unemployment compensation.
Your Tax Return May Change
Because your income for the year may be lower, it’s possible you could receive additional credits, such as the Earned Income Credit. You may also be in a lower tax bracket. Double-check your tax return to make sure you’re taking advantage of all applicable deductions and credits.
If you don’t increase your withholdings or make estimated tax payments, you could end up owing a significant amount at tax time. To get help setting up a payment plan or finding another tax resolution option, consult with a tax attorney.
Contact The Gartzman Law Firm to speak with an Atlanta tax attorney about your case. Request your consultation by calling (770) 939-7710.