Do You Have to Pay taxes on Unemployment Income?

Do You Have to Pay taxes on Unemployment Income?

Finding Out if You have to Pay Taxes on Unemployment Benefits

Unemployment remains high and is still in the double digits in some states, but many Americans are filing taxes while unemployed for the first time. Tax laws are governed by the state of the economy, and the government makes amendments from time to time mainly with a view to giving relief to tax payers. But does the government assist those who are unemployed?

Even if you have been unemployed for more than a year you still need to file a federal income tax return. It is important to remember that all unemployment compensation is taxable. In addition, because you may be in a lower income bracket than when you were working, you may qualify for more deductions or different types of credits than you have in the past. Also, keep in mind that certain job search expenses can be deductible for some taxpayers.

Are Unemployment Benefits Taxable?

For 2010, all unemployment compensation is taxable. Unlike wages, no tax is withheld from unemployment unless you specifically request it by submitting a completed Form W-4′ Voluntary Withholding Request. Once your request is processed, 10% of your benefits will be withheld for federal taxes. Also, you may be able to deduct some of the expenses of finding your next job.

After the first of the year you will receive Form 1099-G from your state’s Department of Labor and Employment containing the necessary information to complete your taxes. Form 1099-G will show the total amount of benefits received and any withholding. The unemployment benefits are taxable on your federal return. H&R Block and TurboTax have online tax prep software for filing your taxes yourself that can help you accurately claim your deductions, credits and job-hunting expenses automatically.

Deductions Related to Your Job Search

You are entitled to tax deductions for expenses you incur in your job search. Deductible expenses include travel, resume preparation, printing, and postage. You can deduct job-seeking expenses as long as the amount of all miscellaneous itemized tax deductions is more than 2% of your adjusted gross income (AGI). To figure your tax deduction, subtract 2% of your AGI from the total amount of these expenses.

Make sure you keep the supporting receipts to make these claims. Job search expenses can be deducted as miscellaneous itemized tax deductions if you look for a job in the same field at the same level as the one you left. Job search expenses are deductible even if you don’t get the job.

Allowable Job Search Tax Deductions

You may be eligible for the following deductions while you’re searching for a job:

  1. Resume preparation: typing and printing, postage, long-distance charges, advertising, and professional resume preparation fees required for your resume.
  2. Travel: airfare, mileage, meals (based on either actual expenses or standard federal per diem rates) and lodging (actual expenses only) if the primary purpose of the trip is to look for a job and the taxpayer is away from home.
  3. Employment agency fees: While not a deduction item, the handling of agency fees can have an effect on your tax situation.  Learn about all the Job Search Deductions you may be able to take this year.

Qualifying for Job Search Tax Deductions

To qualify for the deduction, your job search must be for a job in your current, or most recent, trade or business.

  • If you haven’t held a job in that trade or business for an extended length of time, your job search will be considered for a new trade or business, and your deductions may not be allowed.
  • If you’re just out of school and had no paying jobs while in school that were related to your trade or business, your deductions won’t be allowed.

In addition to getting a tax deduction for your job search, you may also want to look into some additional education or skills training that can help you land a job. Outdated job skills can prevent you from getting a job in many cases.

Earned Income Tax Credit

The Earned Income Credit (EIC) is a valuable credit for lower-income taxpayers who work. If you worked for any part of the tax year, even if you were unemployed at the end of the year, you may still be eligible for the Earned Income Tax Credit (EITC). It provides a tax credit for one child of up to $3,050. This tax credit is for people who have worked in the tax year, and have earned a low to moderate income. By reducing the amount of taxes you owe, a tax credit means more money for you- and possibly a refund.


Taxes can be a real headache and I do not recommend just doing them on your own. I have used both TurboTax as well as H&R Block and they are so much better than going it alone, they also have options to help you file your taxes online for free. Keep in mind that the only way you can really file them for free is if you do not have anything to itemize on your return and no deductions yet.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

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