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How Unemployment Tax Benefits Work

        Money | Taxes

An office clerk peruses an application for unemployment in New York while the applicant waits. There are some tax breaks to offset the taxes on your unemployment checks.
An office clerk peruses an application for unemployment in New York while the applicant waits. There are some tax breaks to offset the taxes on your unemployment checks.
© James Leynse/Corbis

If you lose your job, generally one thing that cushions the pain is the unemployment insurance benefit you would be entitled to from the government (in most cases). But just because you've been out of work for a while doesn't mean Uncle Sam is going to forget about you come tax time. The good news is that there are a few breaks available for unemployed filers.

First thing's first: That weekly unemployment check that you've (hopefully) been receiving is taxable. If you make more than $10,000 ($20,000 for joint filers) over the year in benefits and other income, you are required to file a tax return. You can choose to have estimated taxes withheld from the checks up front or you can pay it back at the end of the year. Married couples can also choose to have more money withheld from a working spouse's paycheck to cover taxes owed on unemployment benefits for the other spouse. The agency that handles unemployment insurance in your state will send you a Form 1099-G, detailing the amount paid to you and any sums that were withheld for taxes, sometime after January [source: Bell].

The amount that you owe will depend on your total taxable income. Unemployment benefits are treated like other sources of income -- salary, return on investments, etc. -- and is used to determine your tax bracket, which controls your tax rate [source: Bell].

Keep in mind that you may be owed a tax refund if you worked some of the year because the estimated taxes withheld during that time were based on the assumption that you would continue to make the same amount of money. Like unemployment benefits, earnings from severance pay or unused sick leave from your former employer are also taxable.


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