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Taxation of unemployment compensation

Posted by Andrew Chan  March 29, 2010 03:00 PM

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How is unemployment compensation taxed? I received unemployment compensation in 2009 and heard that it may be tax free.

Unemployment compensation is normally subject to federal income taxes. However, the American Recovery and Reinvestment Act of 2009 (ARRA), allows every taxpayer who received unemployment compensation in 2009 to exclude $2,400 of that compensation from federal income tax. This applies to each person. Therefore, for married couples, each spouse can exclude $2,400 of their 2009 unemployment compensation. Unemployment compensation received in 2009, above the first $2,400 is taxable.

If you received unemployment compensation in 2009, you should have received a Form 1099-G showing the amount of compensation received and the amount of any federal taxes withheld from that compensation. Be sure to include this 1099-G when completing your 2009 tax return to account for the $2,400 exclusion. For more information, see IRS Publication 525 on Taxable and Nontaxable Income. (http://www.irs.gov/pub/irs-pdf/p525.pdf)

The $2,400 exclusion does not apply to unemployment compensation received prior to 2008 and after 2009. For more information on the ARRA, visit the IRS web site at http://www.irs.gov/newsroom/article/0,,id=204335,00.html
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