While the broader economy has made serious strides toward recovery in the past few years, many Americans are still struggling to make ends meet. That includes people who are collecting unemployment insurance benefits, or did at any point in 2013. These people might face another issue today, though: The way in which such payments will affect their tax liability.
While many people may not realize it, the fact of the matter is that any benefits received through unemployment are indeed taxable, and this will change their liability for this filing season in a number of ways, according to a report from the Michigan Chronicle. Any such benefits collected from a state government counts toward taxable gross income, and the agency distributing those funds sends 1099s to the IRS and benefits recipients so that the former knows about the payments, and the latter can claim them on their 1040s.
However, it should further be noted that payment from unemployment agencies does not count as actual wages, and therefore do not have Social Security or Medicare taxes taken out of them, nor are these funds counted as earned income, the report said. Thus, they cannot be used to reduce liabilities overall through the Earned Income Tax Credit. Further, they are typically not counted toward income tax in-state either, meaning that consumers could actually owe a lot more than they expect.
with kids should be on the lookout
In addition, those who claim children as dependents, and then had that younger person become eligible for unemployment insurance through a layoff, might end up facing an additional filing complication, the report said. When children have investment income - which includes unearned income such as unemployment benefits - of $1,900 or more and are still being claimed as dependents, they will be taxed at the rate of the parent or guardian's rate. This essentially means that this would affect the ability of a parent to file on their child's behalf until they've completed their own documents.
Consumers of all backgrounds, however, might want to take the time to make sure they work with a tax professional on their filings, as a means of determining all aspects of their liabilities, and uncovering whatever benefits may be available to them to reduce it.