In 2016 there are over seven million individuals out of work and collecting unemployment benefits. When these individuals file their returns they are allowed to exclude the first $2,500 of the benefits they received thanks to the American Recovery and Reinvestment Act.
The IRS said that if more than one spouse is collecting benefits, both are allowed to exclude the first $2,500. In 2009 the IRS Commissioner Doug Shulman said, "This change offers a helping hand to millions of Americans who are out of work and struggling to make ends meet." This new tax break does not apply to benefits received in prior years.
Individuals who are still out of work and collecting more than $2,500 in benefits can opt for having tax withheld on these excess amounts. Choosing to have income tax withheld from unemployment benefits will help prevent any surprises at the end of the year. Bear all this in mind when you start your income tax return.
Use Form W-4V, Voluntary Withholding Request, or the equivalent form provided by the payer to request withholding to begin or end. Form W-4V is also available on IRS.gov or by calling the IRS toll-free at 1-800-TAX-FORM (829-3676).