Yes, Unemployment Compensation is fully taxable.
However, for tax year 2020, you may qualify to exclude the first $10,200 of unemployment benefits.
For tax year 2020:
The first $10,200 of unemployment income can be excluded from your federal income. If married filing jointly and both spouses received unemployment, the amount increases to $20,400. The AGI must be less than $150,000 for both single and joint filers.
If the taxpayer has already filed for 2020, they will be affected. The IRS has indicated that they will automatically review returns that include unemployment compensation to ensure the exclusion has been applied. The IRS will determine the correct taxable amount of unemployment compensation and tax. Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed.
You may need to file an amended return if the corrected taxable income allows you to claim credits or deduction not allowed on the original return. For example, if you claimed the Earned Income Credit but now qualify for a larger credit based on the income, the IRS will adjust the refund to reflect the larger credit. However, if you did not qualify for the credit on the original return due to the income and you do now, you will need to file an amended return.
If the IRS adjusts your return for the unemployment exclusion, they will send you a refund. The first refunds are expected to be made in May and will continue into the summer.
This exclusion is only for the 2020 tax year.
How do I report my unemployment compensation?
You must include all unemployment compensation received in the income you report on your taxes each year. If you qualify for the exclusion, it will be automatically applied based on your entries.
You should receive a Form 1099-G, and the total unemployment paid to you will show in box 1. Make the entry in the program:
- Federal Section
- Unemployment Compensation
- 1099-G Box 1
You may choose to have federal income tax withheld from your unemployment by completing Form W-4V, Voluntary Withholding Request and submitting it to your unemployment office. The taxes will be withheld at 10% of your payment. Additional state taxes may be necessary depending on where you live, so you should check with your individual state.
For more information, see our Unemployment Compensation article.