The IRS isn’t about to let the fact that you don’t have a job stop it from collecting taxes from you.
You are required to pay taxes on any income received.
That includes the income you receive in the form of unemployment compensation.
And, of course, if you were employed for part of the year, you will have to pay income taxes on that money as well.
The good news is that your employer likely automatically withheld taxes from your paycheck (you probably filled out a W-4 Form when you began working for the company). The bad news is that the government won’t automatically withhold your taxes from your unemployment income.
If you want money withheld for taxes, you will have to take some initiative and request a Form W-4V. Fill this form out, and you can have 10% of the unemployment income you receive withheld.
This makes the process a little easier. It’s not fun, when you are out of work, to have 10% of your unemployment compensation withheld, but it’s easier to pay in those small chunks over time than to be slammed with a big tax bill all at once.
Tax Break on Unemployment Compensation Expired
For those who have been unemployed for more than a year, this tax season’s changes could bring an unpleasant surprise: Taxes on the full amount received in unemployment compensation. In 2009, as part of the economic stimulus package, Congress allowed a tax exemption the first $2,400 of unemployment compensation received.
This per-person exemption meant that those who were married could receive an exemption for up to $4,800 in income from unemployment compensation. What some may have forgotten, though, is that this exemption only applied for the 2009 tax year. That tax year is long past; this coming season is for tax year 2011. There is no exemption for unemployment compensation at all. So you will have to be prepared to pay taxes on all of what you received.
Get Ready to Pay What You Owe
If you received unemployment compensation in 2011, you will have to pay taxes on them in 2012. Tax returns are due by April 17, 2012 (the last day to file taxes has been extended this year for everyone). For many people who have been unemployed for a long period of time, and who have little household income, chances are that the tax bill won’t be very big anyway.
However, when you are unemployed, any obligation can seem overwhelming. That means that it is a good idea to begin preparing to pay what you owe right now.
By the end of January or the beginning of February, you should be receiving your 1099-Gs. These forms will explain how much of your unemployment income should be reported for tax purposes. Add that income to the any other income you have received (from your spouse, selling investments, part-time or contract work, interest earned on deposit accounts, etc.) and figure out how much you have made.
You can get an estimate of what you will owe by visiting with a tax professional. A tax professional can help you figure up your deductions, apply credits and the amount of taxes you might have already paid, and come up with a total owed. Can’t afford a professional, visit the free TaxCaster tool from TurboTax.
It is also possible to prepare yourself by looking at a federal tax bracket. Find out how much you will owe for your income range, and subtract what you have already paid in taxes.
This will give you a rough estimate of what you owe if you don’t want to figure out deductions and credits right now, and you aren’t prepared to pay a tax professional.
However, if you are unsure of what you will owe in taxes, it is a good idea to prepare your tax return as soon as possible so you can explore your payment options, which include saving up now, or getting a loan from the IRS (or from somewhere else) to cover the bill.
Find out what to do if you can’t pay your taxes.