Under the American Recovery and Reinvestment Act of 2009 (ARRA), the first $2,400 of unemployment benefits received by a taxpayer during 2009 are not subject to federal income tax. The Internal Revenue Service (IRS) recently released IR-2009-29, First $2,400 of Unemployment Benefits Tax Free for 2009, to help taxpayers understand the new rules.

“This morning we learned that a record 5.6 million people were receiving unemployment benefits in the middle of March. This underscores the need for the relief provided by [ARRA], which includes making the first $2,400 of unemployment insurance exempt from tax,” said IRS Commissioner Doug Shulman. “I urge all unemployed workers to 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.”

Married couples who are both collecting unemployment benefits may each claim exemption for up to $2,400 thereby allowing up to $4,800 to be received tax-free in certain circumstances.

Individuals who are working and receiving unemployment benefits should consider filing a revised Form W-4, Employee’s Withholding Allowance Certificate or its Spanish equivalent, Formulario W-4(SP), Certificado de Exención de la Retención del Empleado to reflect both the exemption from tax for some unemployment benefits as well as the reduced withholding under ARRA.

Contact Vision Payroll if you have any questions on the taxation of unemployment benefits under ARRA.