If you received unemployment benefit in 2022, you must state it on your tax return. It might seem like a cruel trick to some, but if you lose your job and successfully file for unemployment, you usually have to pay taxes on the money you receive.
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If you still don’t have a job by the time you file your taxes, it can be difficult to raise the money to pay your taxes. So plan ahead as much as you can once you get your benefits. As the 2023 tax deadline approaches, here’s what you need to know about unemployment benefits and taxes.
Benefits are taxable nationwide
From the point of view of the federal government, your unemployment benefit corresponds to your wages. Unemployment benefits are funded through taxes paid by employers.
If this money is paid to an unemployed person, it is intended to replace wages. Unemployment benefits are therefore considered a form of income and are subject to federal income tax in the same way as your ordinary paycheck.
However, you can take a break from your state taxes
The unfortunate truth is that most states actually tax unemployment benefits, as does the federal government. However, some states have no income tax, which means your unemployment benefit will also go untaxed. Some other states simply choose not to tax unemployment benefits, while others only tax a portion of them.
Alaska, for example, has no state tax and therefore does not tax unemployment benefits. But even though Alabama has a state income tax, unemployment benefits go untaxed. Indiana taxes unemployment benefits, but a portion can be deducted.
You must contact your tax advisor or your state tax authority to determine which law applies in your state.
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You can withhold some taxes
To avoid nasty tax surprises, you can choose to withhold taxes from your unemployment insurance. If you choose to do so, federal law allows you to withhold 10% of your unemployment compensation to cover part or all of your taxes.
It’s important to note that if you choose to withhold tax from your check, you should file Form W-4V with the agency paying your benefits, not the IRS. Another option is to pay quarterly estimated taxes, just like a self-employed person.
Locate your Form 1099-G
To ensure you pay the correct amount of tax, look for a 1099-G in the mail from your state tax agency. Typically, tax forms such as 1099-G are mailed on or about January 31 of the year after the benefits are received. Field 1 on the 1099-G shows the total unemployment compensation paid to you, which you must report on your taxes.
Note that in some states, like California, your entire unemployment benefit program is accessible online. That means you can log into a state-run website and access all of your unemployment benefit information, including tax forms like your 1099-G. Check with your state if you can get electronic copies of your 1099-G, especially if you haven’t received it in the mail by February.
Note: things have changed since 2020
When the devastating first effects of the 2020 coronavirus caused many businesses to close their doors, the unemployment rate skyrocketed. Many Americans who have never been unemployed before have had to apply for unemployment benefits for the first time.
If you were one of the many Americans who received unemployment benefits in 2020, it’s important to know that taxation on unemployment benefits was suspended for that year only. Special laws allowed Americans to exempt up to $10,200 of their unemployment benefits from taxation.
However, this policy was not extended to 2021. For tax year 2022 and for the foreseeable future, unemployment benefit taxation has returned.
The final result
With tax season ramping up, it’s time to get all your paperwork in order, especially if you received unemployment benefits in 2022. Locate Form 1099-G by mail or electronic delivery and be prepared to pay taxes on your unemployment benefits as if they were regular income.
Make sure you owe state taxes on these payments as well.
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This article originally appeared on GOBankingRates.com: Taxes 2023: Tips on Handling Unemployment Benefits