Unemployment benefits taxed in Alabama explained

(Source: MGN Photo - Julie Chasen / MGN)
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HUNTSVILLE, Ala. (WAFF) -- If you're one of the millions of Americans suddenly out of work and relying on unemployment benefits because of the pandemic, you're probably saving every penny you can.

But it’s important to remember in Alabama you might have to pay some of that cash back in federal taxes.

Alabamians get two choices: Deduct 10 percent in federal taxes from your check immediately or wait to pay when you file your tax return. But if you wait, you could face an unexpected tax hit next April.

Here are three strategies to avoid that.

1. Ask to have your taxes withheld. When you sign up you can ask to have 10% of your payments withheld to cover federal income taxes. If you’re already receiving benefits, you can fill out an IRS voluntary withholding request.

2. You can pay your estimated taxes every quarter. This method is popular for small business owners or self-employed individuals.

3. You can save part of your payment. Financial experts suggest putting the money away in a separate savings account.

Whenever you decide to pay the taxes owed really depends on your financial situation. “It is certainly a personal choice. That is up to each individual claimer whether they want to have that deduction removed right away or pay that tax liability at the end of the year. However, it does make it easier for many people, it is just one less thing they have to worry about,” said communications director with the Alabama Department of Labor, Tara Hutchison.

The money you received from the stimulus check, is all yours. It is tax free and doesn't count as income for government assistance programs.

However, because unemployment benefits count as income, it could disqualify you from getting food stamps or federal subsidies for health insurance policies.

Representatives at the department of labor want you to know taxing unemployment benefits is not new because of the pandemic. Those checks have always been taxed by the federal government.

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