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After the stress of losing their job and figuring out how much their the unemployment check would cover, chances are good taxes are not too many people’s priority.
Nonetheless, unemployment compensation is treated as taxable income by both the IRS and by most states. (The exceptions are Alabama, Alaska, California, Florida, Montana, Nevada, New Hampshire, New Jersey, Pennsylvania, South Dakota, Tennessee, Texas, Virginia, Washington and Wyoming.)
“Withholding tax on unemployment benefits is voluntary at both the federal and state levels,” said Julie Sforza-Smith, program manager at the H&R Block Tax Institute.
In this case, the income taxes due will be assessed at tax time.
So some people might get a “nasty surprise” when doing their taxes this year, said Elaine Maag, senior research associate at the Urban-Brookings Center for Tax Policy.
This may be especially true for anyone who ended up earning more unemployment than they did while working, thanks to the federal supplement of $ 600 per week to unemployment benefits that was in effect from April to July. This was paid in addition to the state unemployment benefit, which averages $ 380 per week. In these cases, especially if someone had other sources of household income, such as a spouse’s paycheck, their total tax may be higher than normal.
“This is going to be a big surprise for a lot of people,” Maag said.
But the net effect may not mean they have to write a check to the IRS when they file their tax return. Instead, they may just see a smaller refund than expected, as their increased income may reduce their eligibility for large tax credits, like the refundable earned income tax credit.
Last year, 77% of filers got a refund from the IRS, according to data on returns processed at the end of November. And the average reimbursement paid was over $ 2,500.
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