| You lost your job a few months ago and have been receiving state unemployment compensation benefits. To add insult to injury, your neighbor tells you that he thinks the benefits are taxable! Could that possibly be right?
In the eyes of Congress, the purpose of unemployment compensation programs is to provide regular cash benefits to temporarily unemployed workers who are normally employed for the limited periods in between jobs. Therefore, federal or state unemployment compensation benefits, which are basically wage replacements, are treated in the same as wages or other wage-like benefits for income tax purposes. They are all includible in gross income.
Taxable unemployment compensation benefits include:
- Amounts received under the unemployment compensation laws of the United States or of a state, including railroad unemployment compensation benefits but not disability benefits for injuries.
- Governmental disability payments (but not worker's compensation) due to illness or injury that are received by a worker as a substitute for state or federal unemployment benefits.
- Other benefit programs deemed to be taxable as unemployment compensation.
If you received unemployment benefits from a private fund to which you voluntarily contributed, the payments are taxable only to the extent that the amounts received exceed your total payments to the fund. Similarly, if you contributed to a governmental employment compensation program with non-deductible contributions, the amounts received under that program are not included in income until you recover the full amount of your contribution.
Any supplemental unemployment benefits received from a company-financed fund are fully taxable as wages, not as unemployment compensation.
Copyright 2010 LexisNexis, a division of Reed Elsevier Inc. |