First $2,400 of Unemployment Benefits Tax-Free for 2009

During March, close to six million people were receiving unemployment benefits; thanks to the relief provided by the American Recovery and Reinvestment Act, the first $2,400 of these unemployed workers’ unemployment insurance was exempt from tax.  

Unemployment compensation recipients should take this special tax break into account as they plan their tax withholding and quarterly estimated tax payments for the year.  This change offers a helping hand to millions of Americans who are out of work and struggling to make ends meet.

Under the American Recovery and Reinvestment Act enacted in February, every person who receives unemployment benefits during 2009 is eligible to exclude the first $2,400 of these benefits when filing their tax return next year.  For a married couple, the exclusion applies to each spouse, separately.  Thus, if both spouses receive unemployment benefits during 2009, each may exclude from income the first $2,400 of benefits received.

The new law doesn’t affect the tax returns for 2008, so unemployment benefits received in 2008 and prior years remain fully taxable.

Unemployed workers can choose to have income tax withheld from their unemployment benefit payments.  Withholding on these payments is voluntary.  However, choosing this option may help avoid a surprise year-end tax bill or a possible penalty for having paid too little tax during the year.  Those who choose this option will have a flat 10% tax withheld from their benefits.

Unemployed workers who expect to receive more than $2,400 in benefits this year should consider having tax withheld from their benefit payments in excess of that amount.  Those unemployed workers who have already chosen to have tax taken out of their benefits should consider the $2,400 exclusion in determining whether to continue to have tax withheld.

You can use Form W-4V, Voluntary Withholding Request, or the equivalent form provided by the payer to request withholding to begin or end.  If you have questions or need assistance in determining your withholding or adjusting estimated amounts for the year, be sure to call this office.

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