Some Arizona families could be in for a nasty surprise in 2021 due to unemployment benefits

Tax Day headaches loom for some Arizonans

Unemployment benefits are taxable, but some Arizonans are not withholding tax money for their unemployment benefits.

PHOENIX - Since March, the Arizona Department of Economic Security has been dealing with countless issues in delivering unemployment benefits to Arizonans who have lost their jobs. Now, there is another problem lurking underneath those weekly payments.

Unemployment benefits are taxable

According to IRS officials, unemployment compensation is taxable by law, and must be reported on federal tax returns.

When applicants file, they are given a choice on whether or not to withhold tax money. As it turns out, however, the vast majority of claimants chose to keep all of their money, which could have big ramifications come Tax Day in 2021.

According to DES officials, 227,000 of the 370,000 Arizonans on regular unemployment are having taxes withheld, and only 204,000 of the 906,000 on Pandemic Unemployment Assistance (PUA) are withholding, meaning that only 33% of the 1.2 million people collecting assistance in the state are setting aside money for taxes.

"That can be really worrying," said Andrew Sugrue with the Arizona Center for Economic Progress

Sugrue says because unemployment has been increased by hundreds of dollars every week, what recipients owe in taxes is even more than normal.

"You can’t blame someone for not withholding, but at the same time, unemployment insurance is taxable, and the bill for these taxes is going to incur at some point," said Sugrue.

Many Americans unaware of unemployment benefits tax requirements

According to a Credit Karma survey, more than a quarter of unemployed Americans were unaware unemployment is taxable.

Sugrue are advising people to add the withholding now, if they can.

"Better to pay it now and pay as you go than subject to a big bill at the end of next year," said Sugrue.

DOR official speaks out

On September 1, the Department of Revenue released a statement, which reads:

"Because everyone's tax situation is different and individuals know their specific circumstances best, the Department is not in a position to make recommendations as to whether taxpayers should withhold through the application."

Officials add the unemployment application makes clear unemployment is taxable.