Many Americans received financial assistance during the COVID-19 pandemic in the form of stimulus checks and unemployment benefits. With tax season approaching, a common question arises: “Is my stimulus or unemployment income taxable?” Understanding how these payments are treated by the IRS is critical for accurate tax reporting and to avoid surprises during tax filing.
Are Stimulus Payments Taxable?
The short answer is: No, stimulus payments are not taxable income.
Economic Impact Payments (EIPs), commonly referred to as stimulus checks, were advance payments of the Recovery Rebate Credit issued during 2020 and 2021. These payments were authorized by the following federal legislation:
- The CARES Act (March 2020)
- The COVID-Related Tax Relief Act (December 2020)
- The American Rescue Plan Act (March 2021)
The IRS clearly states that these stimulus payments do not need to be reported as income on your federal tax return and will not increase your taxable income. In fact, if you didn’t receive the full amount you were eligible for, you could claim the remaining amount as a refundable tax credit on your Form 1040.
How to Report Stimulus Payments on Your Tax Return
Although stimulus payments are not taxed, you are required to reconcile them on your tax return using the Recovery Rebate Credit (Line 30 on Form 1040). If you were underpaid or didn’t receive a stimulus payment but were eligible, you can receive the difference as a credit, potentially boosting your refund.
To complete this section accurately, you will need:
- IRS Letter 1444 or Notice 1444-C showing how much you received
- IRS online account to verify your stimulus amounts
Is Unemployment Income Taxable?
Yes, unemployment benefits are generally taxable income at the federal level. This includes benefits paid by state unemployment programs, as well as supplemental benefits like:
- Federal Pandemic Unemployment Compensation (FPUC)
- Pandemic Emergency Unemployment Compensation (PEUC)
- Pandemic Unemployment Assistance (PUA)
- Lost Wages Assistance (LWA)
All these benefits are taxed as ordinary income, and you must report them on your Form 1040.
Temporary Exclusion in 2020
As a one-time measure during the pandemic, the American Rescue Plan Act of 2021 excluded up to $10,200 of unemployment income from federal tax for the 2020 tax year only—but only if your modified adjusted gross income (MAGI) was less than $150,000.
This exclusion does not apply for 2021 or 2022 tax years and beyond. All unemployment compensation for these years is fully taxable.
Where to Report Unemployment Income on Form 1040
Unemployment benefits are reported on Schedule 1 (Form 1040), Line 7. The total amount received should be listed on your Form 1099-G, which you’ll receive from your state’s unemployment office. This amount is then carried to Line 8 of your Form 1040.
Can You Withhold Taxes from Unemployment Benefits?
Yes, the IRS allows you to elect to have federal income tax withheld from your unemployment checks at a flat rate of 10%. This is done by submitting Form W-4V (Voluntary Withholding Request) to your state unemployment agency.
However, many people didn’t opt for withholding, which caused large unexpected tax bills during tax season. If you received unemployment without withholding, you may owe federal taxes and possibly state taxes, depending on your location.
Are Unemployment Benefits Taxed at the State Level?
Tax treatment of unemployment income varies by state. Some states tax it like ordinary income, while others exempt it entirely. Here’s a general classification:
States That Tax Unemployment Benefits:
Examples include:
- California
- New York
- Ohio
- Georgia
- Illinois
States That Do Not Tax Unemployment Benefits:
- Alabama
- California (at state level)
- Montana
- New Hampshire
- Pennsylvania
Check your state tax department’s website for the most accurate information for your jurisdiction.
How Stimulus and Unemployment Income Affect Other Tax Credits
Even though stimulus payments aren’t taxable, they can affect your eligibility or calculation for tax credits such as:
- Earned Income Tax Credit (EITC): You can elect to use your 2019 earned income if it’s higher than your 2020 or 2021 income to calculate the EITC.
- Child Tax Credit (CTC): Stimulus payments are not included in income, so they don’t reduce your eligibility.
Unemployment income, on the other hand, does count as income for determining eligibility for many tax credits and could reduce the amount you qualify for.
What If I Missed Reporting Unemployment or Stimulus?
If you didn’t report unemployment benefits in prior years, you may need to amend your return using Form 1040-X. Failing to report unemployment income may result in IRS notices, penalties, or interest.
If you missed a stimulus payment, you can claim the Recovery Rebate Credit on your tax return for the corresponding year.
Tips to Prepare for Tax Season
- Keep your Form 1099-G for unemployment benefits
- Check IRS Letters 1444 or IRS online account for stimulus amounts
- Use the Recovery Rebate Credit Worksheet to reconcile payments
- Consult a tax professional if your situation is complex
Conclusion
In summary, stimulus payments are not taxable and should be reconciled with the Recovery Rebate Credit on your return. Unemployment benefits, however, are taxable at the federal level and possibly at the state level as well. Understanding the differences and reporting them correctly ensures you avoid IRS issues and make the most of available credits. When in doubt, consult a tax professional or visit the official IRS website for the latest guidance.
