Tax Tips: Unemployment Benefits

The unemployment rate in Orange County continues to hover at about eight percent, and many receive unemployment benefits from the state and federal government. Nevertheless, even those receiving unemployment compensation have to pay taxes on those benefits, according to the Internal Revenue Service.

There are multiple types of unemployment benefits, and the tax implications may be different for each type. Unemployment benefits include benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund, railroad unemployment compensation benefits, disability payments from a government program paid as a substitute for unemployment compensation, trade readjustment allowances under the Trade Act of 1974, and unemployment assistance under the Disaster Relief and Emergency Assistance Act, according to the IRS.

Here are some tips regarding taxes and unemployment benefits from the IRS:

• People who received unemployment compensation in 2011 must include it as part of their income in their taxes. These people should receive a Form 1099-G, which will state the total amount of unemployment compensation paid to an individual over the year.

• Benefits paid to an unemployed member of a union from regular union dues must be reported. Nevertheless, if a person contributed to a special union fund where payments aren't tax-deductible, the person only needs to include the amount of money paid in unemployment benefits that exceeds the amount of the contributions.

• Federal income tax can be withheld from unemployment compensation if a recipient completes Form W-4V (Voluntary Withholding Request) and gives it to the paying office. If a person elects to have federal income tax withheld, it will be at a 10 percent rate. Those who choose not to have tax withheld may have to make estimated tax payments throughout the year, according to the IRS.

More information about the different types of unemployment benefits as well as other unemployment-related information can be found in chapter 12 of IRS Publication 17 (Your Federal Income Tax) or Publication 525 (Taxable and Nontaxable Income).