Unemployment Compensation

Reporting and Taxability of Unemployment Compensation

The term unemployment compensation includes any amount received under an unemployment compensation law of the United States or of a state. Accordingly, all the following benefits are considered unemployment compensation:

 Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund;

 State unemployment insurance benefits;

 Railroad unemployment compensation benefits;

 Disability payments from a government program paid as a substitute for unemployment compensation;

 Trade readjustment allowances under the Trade Act of 1974;

 Unemployment assistance under The Disaster Relief and Emergency Assistance Act of 1974;

 Unemployment assistance under the Airline Deregulation Act of 1978 Program; and

 Benefits from a private fund exceeding voluntary contributions to it made by the taxpayer.

Unemployment Compensation Taxable

Although the American Rescue Plan Act of 2021 provided for an exclusion of $10,200 of unemployment benefits received in 2020 by a taxpayer whose modified adjusted gross income was less than $150,000, recipients of unemployment compensation are generally required to include all such compensation in income for tax purposes. The taxpayer should receive a Form 1099–G showing (in box 1) the total unemployment compensation paid. In most cases, the total amount of unemployment compensation shown should be entered on line 7 of Form 1040, Schedule 1.

In some cases—those involving certain governmental unemployment compensation programs to which the taxpayer contributed and unemployment compensation that was repaid—not all of the amount received during the year should be included as unemployment compensation. Let’s consider each of these cases.

Nondeductible Contributions to Governmental Unemployment Compensation Plan

If the taxpayer made nondeductible contributions to a governmental unemployment compensation program, the amounts received by the taxpayer under the program are not includible as unemployment compensation until the taxpayer has received an amount equal to his or her entire contribution tax-free. In contrast, if the taxpayer deducted all his or her contributions to the program, the entire amount received under the program would be includible in the taxpayer’s income.

Repayment of Unemployment Compensation

If the taxpayer repaid employment compensation received in 2022 in the same year, the tax preparer should subtract the amount repaid from the total amount of unemployment compensation received and enter the difference on line 7 of Form 1040, Schedule 1. On the dotted line next to the entry, enter “repaid” and the amount repaid by the taxpayer. If the amount of unemployment compensation repaid during the year was more than $3,000, the taxpayer may take a tax credit for the year of repayment. In order to take a tax credit for repayment the taxpayer must have believed that he or she had an unrestricted right to the unemployment compensation at the time it was received. Pursuant to tax law prior to 2018, a taxpayer who repaid unemployment compensation received and included in income in a prior year of $3,000 or less, could deduct the amount repaid on Form 1040 Schedule A as a miscellaneous deduction. However, beginning in 2018, taxpayers can no longer claim any miscellaneous itemized deductions, so if the amount repaid was $3,000 or less, the taxpayer may not deduct the repayment from income in the

year repaid

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Unemployment Compensation

Unemployment Compensation