This year’s unemployment reports have been bleak. By the middle of May, more than six million people were receiving unemployment benefits. Luckily, if you're among them, Congress has provided a special tax break for you.
Because unemployment benefits replace your regular wages, the federal government usually taxes them. It certainly doesn’t make much sense from a policy perspective. If you’ve been receiving an unemployment check, a big federal tax bill is the last thing you need. That’s why Congress included an unemployment tax exemption in the most recent stimulus package. If you receive unemployment benefits in 2009, you don’t have to report the first $2,400 that you receive on your federal tax return. Better yet, the exclusion applies to individuals, so if you’re married and your spouse is also unemployed, each of you can claim $2,400. As tax breaks go, it’s better than nothing.
Of course, you will have to pay taxes on the rest of your benefits. Fortunately, you can choose to have taxes withheld from your unemployment checks, just like your regular wages. If you make this choice, your benefit provider will send 10% of each payment to the IRS. Even though it sounds unappetizing to receive a smaller check while you’re out of work, waiting could be worse. If you don’t pay your taxes until April 15 of next year, you could be faced not only with a bigger bill than usual, but also an unsavory penalty for having paid too little during the year.
Being unemployed is no picnic, but the new $2,400 exclusion will make tax time a little bit more palatable. And did you know that you can also deduct the cost of looking for a new job? For more tax facts, be sure to check out the complete archive of Daily Deductions.
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