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Is Unemployment Taxable?

Posted by Juda Gabaie | May 04, 2020 | 0 Comments

Millions of Americans have filed for unemployment benefits since the coronavirus pandemic. For those who cannot work from home, the stay-at-home orders have closed up a lot of businesses and left a lot of people without work. From March 15 through April 3, 2020, more than 234,000 people filed for unemployment in Maryland

The number of claims actually fell in Maryland for the week ending April 11, 2020. However, the long-term impact of COVID-19 will leave a lot of people dealing with the Maryland Department of Labor and unemployment payments. One of the most common questions people have after getting unemployment benefits is whether those payments are taxable.  

Unemployment Benefits are Taxable Income 

It may not seem fair that at a time when you are unable to work your unemployment benefits are taxable, but the Internal Revenue Service (IRS) has a very broad definition of income. Under Internal Revenue Code (IRC) § 61, except as otherwise provided, “gross income means all income from whatever source derived.”

The IRS website provides guidance on unemployment compensation: “If you received unemployment compensation during the year, you should receive Form 1099-G, showing the amount you were paid. Any unemployment compensation received must be included in your income.”

Unemployment compensation includes any amounts received under the unemployment compensation laws of the U.S. or of a state, including Maryland. Additionally, you may be required to make quarterly estimated tax payments if you do not have federal income taxes withheld. 

Failure to Claim Unemployment Benefits

Your state generally sent a 1099-G showing the total amount of unemployment benefits paid for a given tax year. The IRS will also receive notice of this amount. Failure to file your taxes or failure to include your 1099-G may result in a tax penalty. Penalties for not filing your tax return or underpayment may include:

  • Penalty fees, 
  • Interest on unpaid taxes,
  • Licensing consequences, 
  • Liens or levies on property, and
  • Criminal charges.  

Income Too Low to Pay Taxes

If your income is below a certain level, you may not end up owing any taxes from your unemployment compensation. Alternatively, you may end up getting a refund of some of the taxes withheld from unemployment benefits. Low-income households may end up paying little or no federal income tax. However, that is based on their total taxable income, which will still include unemployment compensation, even if it does not end up getting taxed. 

Will Tax Law Change by Next Year?

Any unemployment compensation for payments in 2020 will generally be filed with your taxes in 2021, with a filing deadline of April 15, 2021. However, Congress may make significant changes to U.S. tax law over the next year. Talk to your tax lawyer about any questions you have about what kind of income, benefits, and payments may be taxable and what tax credits or deductions you can apply. Contact Gabaie & Associates, LLC for a free consultation on your state or federal tax issue at (410) 862-2198.

About the Author

Juda Gabaie

Juda Gabaie Esq. has dedicated his career in defending clients nationwide to resolve tax disputes before the Internal Revenue Service and the state taxing agencies. Juda has represented clients before the US Tax Court, Maryland Tax Court, and Comptroller of MD hearing compliance. As an adjunct prof...

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