Are unemployment benefits taxable in 2025?

Yes, unemployment compensation is fully taxable as ordinary income at the federal level. The temporary exclusion of up to $10,200 in unemployment income that applied in 2020 (under the American Rescue Plan Act) has expired and does not apply to 2024 or later tax years.

How it is reported: You will receive Form 1099-G from your state unemployment office showing the total benefits paid and any federal income tax withheld. Report this on Form 1040, Schedule 1, line 7.

Withholding: You can choose to have federal income tax withheld from your unemployment payments by submitting Form W-4V (Voluntary Withholding Request) to your state agency. The flat withholding rate is 10%. If you did not elect withholding, you may need to make quarterly estimated tax payments to avoid an underpayment penalty at filing time.

State taxation varies: Most states tax unemployment benefits, but some do not. States that do not tax unemployment include California, Montana, New Jersey, Pennsylvania, and Virginia. Check your state tax instructions.

Practical advice: Many people are caught off guard by owing taxes on unemployment income. If you received $20,000 in unemployment and are in the 22% federal bracket plus state taxes, you could owe $5,000-$6,000. Set aside money for taxes or elect withholding when you start receiving benefits. If you owe a large amount, consider setting up an IRS payment plan.