Tax Benefits on Unemployment: What You Need to Know

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Experiencing unemployment can be challenging, both emotionally and financially. However, understanding the tax implications and benefits that come with unemployment can ease some of this burden. This guide on the tax benefits on unemployment offers an in-depth look into the tax benefits and considerations for those on unemployment.


While unemployment benefits provide much-needed support during tough times, it’s essential to understand that they aren’t exempt from taxation. Yet, there are specific tax benefits and strategies you can employ to minimize your liability.

1. Unemployment Benefits Are Taxable

First and foremost, the Internal Revenue Service (IRS) considers unemployment compensation as income, which means you’ll have to report it on your federal income tax return. Many people are unaware of this and face surprise tax bills.

  • Tax Withholding: You can choose to have federal income tax withheld from your unemployment benefits. This can help reduce the burden of a lump sum tax payment when filing your returns.

2. Potential Deductions and Credits

Tax deductions
  • Job Search Expenses: Previously, individuals could deduct job search expenses, such as resume services or travel expenses related to interviews. However, this changed with the Tax Cuts and Jobs Act of 2017. Currently, most individuals can’t claim these deductions, but it’s essential to stay updated in case of future changes.
  • Earned Income Tax Credit (EITC): Depending on your financial situation and if you have qualifying children, you might be eligible for the EITC. This can significantly reduce your tax burden or even provide a refund.

3. Special Provisions and Tax Breaks

Special Tax Breaks

During significant economic downturns, the federal government occasionally introduces tax breaks related to unemployment:

  • Exemption on a Portion of Benefits: For instance, under the American Rescue Plan Act of 2021, the first $10,200 of unemployment benefits received in 2020 were made non-taxable for households with an adjusted gross income of less than $150,000.

4. State Tax Implications

State Taxes

While the federal government taxes unemployment benefits, states vary:

  • Tax-Free States: Some states do not tax unemployment benefits at all.
  • Partial Taxation States: Some states might tax only a portion of your benefits.
  • No State Income Tax: States like Florida, Texas, and Nevada have no state income tax, so there’s no taxation of unemployment benefits at the state level.

Make sure to check your specific state’s rules.

5. Health Coverage Tax Credits

Health Coverage Tax Credits

Being unemployed might qualify you for specific health-related tax benefits:

  • Affordable Care Act (ACA): If you purchase health insurance through the ACA marketplace due to job loss, you may qualify for premium tax credits, reducing your health insurance costs.

6. Plan Ahead: Quarterly Estimated Taxes

Plan Ahead

If you don’t opt for tax withholding on your unemployment benefits or if you receive other income during the year, consider paying quarterly estimated taxes. This can prevent unexpected tax bills and potential penalties at the year’s end.

7. Tax Counseling and Assistance

Several programs provide free tax counseling and assistance, particularly for those with limited income:

  • IRS Volunteer Income Tax Assistance (VITA): VITA offers free tax help to those who qualify, including assistance with tax benefits related to unemployment.


Facing unemployment can be challenging, but understanding the tax landscape can help you navigate this period more effectively. By leveraging the tax benefits on unemployment and being proactive in your tax planning, you can ensure financial stability and peace of mind during your job transition.

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