Unemployment Benefits Can Raise Tax Questions—And Attract Scammers

Recent reductions in the federal workforce combined with general unease about the economy in the private sector means that some Americans are experiencing job losses. If you lose your job for reasons other than cause, you may be eligible to collect unemployment benefits.

How much you can collect depends on where you live—there is no federal unemployment program. Each state manages its own unemployment insurance program and pays its own benefits. (If you live in a state different from where you worked, file for unemployment in the state where you worked.)

To qualify for benefits, many states require that you have worked consistently and earned at least a certain amount within the last one to two years. You may also have to demonstrate that, after your job loss, you began looking for a new job.

The amount you can receive varies by state but typically totals about half of your prior income. How long you can receive benefits also varies by state—most settle around 26 weeks, though in some states, like Florida and Alabama, it’s much less.

Tax Considerations

After a job loss, the last thing you want to think about is taxes, but getting the tax consequences right is crucial—especially when money is tight. Here are some tax-related tips to help you sort it out:

1. Unemployment compensation may not be taxable for state income tax purposes.

1. For federal income tax purposes, unemployment compensation is taxable. Your state benefits will be reported to you on Form 1099-G. Don’t spend your benefits immediately without considering the potential tax consequences.
2. To eliminate any surprises, you can choose to have federal income tax withholding from your unemployment benefits during the year. This is similar to withholding on your paycheck and means you should owe less at tax time.
3. If you’re worried you might owe at tax time, consider making estimated payments during the year to avoid a potential penalty. Most tax professionals can calculate number for you—the same is true for software programs—but if you’re looking for an easy formula, take the amount of tax you expect to owe in 2025 and divide it by four: that’s your quarterly payment. So, for example, if you expect to owe $5,000 in 2025, you’ll pay $1,250 each quarter ($5,000/4).
4. Food stamps and other public assistance that might be available to you are generally not taxable. Don’t be afraid or embarrassed to ask about benefits. Temporary programs like the Supplemental Nutrition Assistance Program (SNAP), WIC (Women, Infants, and Children), and those offered through TANF (Temporary Assistance for Needy Families) can help put food on the table for your family while you continue to look for work.
5. If you’re now responsible for paying your own health care, you may be able to deduct the cost of those insurance premiums, including COBRA costs, as medical expenses. You would include the costs of those premiums along with your other eligible medical expenses on Schedule A if you itemize (most taxpayers claim the standard deduction). Remember that those expenses are only deductible if they exceed 10% of your adjusted gross income. Here’s a quick example: Let’s say your medical costs total $4,500, and your AGI is $20,000. You can deduct $2,500 of medical expenses: $4,500 (total expenses) less $2,000 (10% of $20,000).
6. Don’t forget that you can use an established health savings account (HSA) to pay medical expenses. The money in the account is yours, even if you lose your job.
7. Don’t overlook available tax credits that you didn’t qualify for when you were working. Even though your income may have exceeded the Earned Income Tax Credit (EITC) threshold in prior years, you may now be eligible for the credit. Assuming you meet the earned income restrictions and other criteria, you may qualify for the EITC—and you don’t have to have kids to collect. Bonus: It’s refundable, so you can get a check even if you don’t owe any tax.
8. If you’re relying on the kindness of strangers—or friends and family—to get through this tough time, those gifts probably aren’t taxable to you. As a rule, the person making the gift (not the recipient) is responsible for any applicable federal gift taxes. For federal income taxes, the mere receipt of the gift is not a taxable event. Remember that the underlying gift keeps its taxable character, so if it’s throwing off interest, for example, that interest would be taxable to you.

Scammers Are Looking At Benefits, Too

Scammers are also taking advantage of unemployment benefits. If you applied for unemployment benefits but haven’t yet received them, you may be the victim of a scam. In one version of the scam, applicants are tricked into filling out an application on a fraudulent website and not from their state unemployment office—always check the validity of a website before you enter information (most legitimate government websites end in .gov, not .com). When in doubt, navigate directly to the website using an address rather than clicking through from another site.

If you were approved for unemployment insurance payments but have not received them, they may have been misdirected to another address. And, if the unemployment office rejected your application for benefits because they already received a claim under your name, a scammer may have filed for benefits using your name and personal information. Contact your state unemployment insurance program if you believe that you might be a victim.

Over the last few years, taxpayers have reported receipt of unemployment-related tax forms or other notices when they did not apply for unemployment benefits. If you’ve received a notice from your state unemployment office or Form 1099-G that shows you received unemployment benefit payments you never received, you may be the victim of a scam—someone may have used your name and personal information to apply for benefits.

If you receive a Form 1099-G you believe is fraudulent, you should report it to your state’s official unemployment benefits agency and request a corrected Form 1099-G. Some states, like my state of Pennsylvania, have specific directions on their websites for reporting fraud. Don’t simply ignore it—remember that unemployment compensation is taxable. However, the IRS advises that when you file your taxes, you should only include income you received, even if you have not yet received a corrected 1099-G—the processing of your tax return should not be delayed while your report of unemployment identity theft is under investigation.

If you receive a Form 1099-G that you believe is fraudulent, you do not need to file Form 14039, Identity Theft Affidavit, with the IRS. Form 14039 should only be filed if your e-filed tax return is rejected because a duplicate return has been filed with your Social Security number (or if the IRS tells you to file the form).

IRS Resources

If you are the victim of unemployment fraud, you should consider opting into the IRS Identity Protection PIN program. An IP PIN is a six-digit number that helps prevent thieves from filing federal tax returns in the names of identity theft victims. The IP PIN is a voluntary program open to any taxpayer who can verify their identity.

You can learn more about identity theft and unemployment benefits from the IRS here.

If all of this seems overwhelming, remember that help is available. Don’t be afraid to ask questions about benefits, deductions, and credits that can help reduce your tax burden at tax time—or help you navigate potential fraud. Ask your tax professional for help, or contact the IRS for assistance.