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Do I pay taxes on unemployment Income?

  Sanjiv Gupta CPA  Published 
Do I pay taxes on unemployment Income?

Many people wonder whether unemployment benefits need to be claimed as taxable income or not. 

The simple answer is that you do pay taxes on your unemployment income even it is from state. It is the same as any other source of income and will be taxed under the California Income Tax laws.

Unemployment received during a calendar year should be included in your taxable income. If it is not reported on your federal tax return, you should report the benefits received on the state tax return. Even though Unemployment Insurance (UI) benefits are referred to as "benefits" they are actually considered taxable income for Federal and State income tax purposes.

Unemployment Benefits paid by California unemployment insurance (UI) program are subject to Federal and State income tax. Even though you do not pay federal or state income taxes on unemployment benefits, most states have a procedure for taxing these benefits as if they were regular wages. This is called "withholding."

If you received Unemployment Benefits during the year, it will be taxed as other unemployment compensation even if you did not receive any other unemployment compensation during the year. If you are unemployed, it is not uncommon to receive benefits from more than one state. For federal tax purposes, you may deduct all unemployment benefit income if the combined total of your unemployment compensation for the year is less than $2,500.

Under California Unemployment Insurance Law (CUIL), benefits are taxable income. California’s definition of Unemployment Insurance (UI) benefits is similar to the federal definition in that it includes any amounts received under an unemployment compensation law of another state or the federal government.

Unemployment Compensation (UC) computed on total earnings during one (1) year, not necessarily consecutive years. If you receive your first UI payment in the middle of a taxable year, the entire UC payment is considered taxable income.

You may claim an offsetting deduction for amounts treated as wages paid to you by your former employer. The amount of this deduction depends on whether you are filing single or married filing jointly. If your unemployment compensation is less than $2,500 you may claim the whole amount as an itemized deduction. If your unemployment compensation is more than $2,500 but less than $3,000 you may deduct the amount over $2,500. However if your UC exceeds $3.000 per year or you are married/RDP filing jointly with income exceeding $26,044, then you can no longer claim the UC benefits as an itemized deduction.

The UC Tax Rate in California will depend on your taxable income. If you are single, your UC tax rate will be .6% if your taxable income is less than or equal to $7,000, your tax rate will be 1.6% if your taxable income is more than $7,000 but less than or equal to $40,000. If your taxable income is more than $40k then the tax rate jumps to 6%.

Caution: Unemployment benefits are subject to Federal Income Tax. Whenever unemployment compensation is received, it must be included in gross income in the year it is received.

It may be used to reduce your Federal Taxable Income, but not your California Taxable income. You cannot claim a deduction on your state tax return for Unemployment Compensation received from another state or federal government.

Unemployment compensation is taxable income for both FEDERAL and STATE taxes. If you are unemployed you will probably receive unemployment compensation from other states or the federal government