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Unemployment Compensation and Your Tax Return

Nov. 17, 2009

As most people are aware, unemployment rates skyrocketed in 2009 ultimately exceeding 10% of the work force last month in October. For many, this may be the first time they have ever been unemployed. Since tax time is rapidly approaching, here are a few things to keep in mind about the unemployment compensation you may have been receiving.


Here is a general review of what constitutes unemployment compensation (UEC).


Generally speaking, benefits include any amounts received under the unemployment compensation laws of the United States or of an individual state. Compensation also includes state unemployment insurance benefits as well as benefits paid to you by a state (or the District of Columbia) from the Federal Unemployment Trust Fund. It also includes railroad unemployment compensation benefits.


Supplemental unemployment benefits received from a company financed fund are not considered unemployment compensation for this purpose. These benefits are fully taxable as wages and are reported on Form W-2, Wage and Tax Statement.


Payments from a private fund, to which you voluntarily contribute, are taxable only if the amounts you receive are more than your total payments into the fund. This taxable amount is not unemployment compensation; it is reported as other income on Form 1040. It is worth noting that worker’s compensation benefits are also not considered unemployment.


If you were one of the millions of people who received unemployment compensation during the year, you should receive a Form 1099-G, showing the amount you were paid. As with other 1099 forms and W-2 statements, this should arrive sometime in January. Any unemployment compensation received must be included in your income.


While UEC is taxable income to you, under the American Recovery and Reinvestment Act of 2009, every person who receives unemployment benefits during 2009 is eligible to exclude the first $2,400 of these benefits when they file their tax return next year. For a married couple, the exclusion applies to each spouse, separately. Thus, if both spouses receive unemployment benefits during 2009, each may exclude the first $2,400 of benefits they receive, potentially reducing total UEC income by $4,800.


Additionally, if for some reason you were overpaid some benefits, these get to be subtracted from the total compensation as well. Form 1099-G will indicate the amount of any overpayment for you to use on your tax return.


You should be aware that each state may have its own laws dealing with unemployment compensation. For example, in Wisconsin, while UEC is taxable, the Department of Revenue does not acknowledge the American Recovery and Reinvestment Act rules for the first $2,400 of income.


Last but not least, UEC can cause a tax liability if you are not careful with your tax planning. If you have not given any thought to what your 2009 tax liability might be, you may want to consult a tax professional before year end, especially if you have been unemployed for most of the year and have not had any withholding taxes removed from your benefit payments. There is still time to make an estimated tax payment which could reduce your tax burden come April 15th.


AmeriTax Tax & Financial Services has been helping clients with tax planning and filing tax returns for over 20 years. Located in West Allis, they can be reached by phone at 414-259-9040 or by email at


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