Don't be surprised by an unexpected state tax bill on your unemployment benefits. Know where unemployment compensation is taxable and where it isn't.
As the COVID-19 pandemic drags on, more and more Americans are getting an unwanted crash course on the U.S. unemployment compensation system. There are a lot of common questions for people seeking unemployment benefits for the first time. How do I apply for benefits? How much will I get? How long will the benefits last? People need answers to these questions right away. But, before long, another question will likely spring to mind: Will I have to pay taxes on my unemployment benefits?
When it comes to federal income taxes, the general answer is yes. Uncle Sam taxes unemployment benefits as if they were wages (although up to $10,200 of unemployment compensation received in 2020 is exempt from federal tax for people with an adjusted gross income below $150,000). However, when it comes to state income taxes, it depends on where you live. Most states fully tax unemployment benefits. However, some states don't tax them at all (sometimes because the state doesn't have an income tax), and a handful of states will only tax part of your benefits. Plus, like the federal government, some states are making special exceptions to their general rule for 2020 and/or 2021 to help people who lost their job because of the pandemic.