If you owe unemployment money can they take your taxes

This story is part of Taxes 2022, CNET's coverage of the best tax software and everything else you need to get your return filed quickly, accurately and on-time.

Table of Contents Show

Do you have to pay taxes on unemployment?
Do you have to pay state taxes on unemployment?
How do I know if I already paid taxes on my unemployment benefits?
How to avoid a large tax bill in the future
Are you recently unemployed due to the coronavirus?
How does unemployment affect my taxes?
Other factors you’ll need to consider:
Will I owe taxes because of my unemployment compensation?
How do I deduct my job-hunting expenses?
Are government benefits taxable?
Do I have to claim my severance pay on my tax return if I already paid taxes?
I lost my health insurance when I lost my job, do I have to pay a penalty?
Are unemployment benefits taxable?
Will the IRS take my refund if I owe unemployment?
Who can take your tax refund?
Will tax refunds be garnished in 2022?
How do I stop the IRS from taking my refund?

Unemployment numbers surged at the start of the COVID-19 pandemic, topping out at 14.7% in April 2020. Even though numbers decreased in 2021, they're still above prepandemic levels. Expanded unemployment benefits, which ended on Labor Day in 2021, provided a lifeline for millions throughout the pandemic. However, if you received any jobless benefits at all last year, you might be in for a shock when you file your taxes.

Unlike stimulus checks, which you don't have to pay taxes on, unemployment payments are considered taxable income and will need to be accounted for on your 2021 return. And this tax season, you won't be able to rely on a tax break for unemployment insurance, either. While taxes had been waived on up to $10,200 received in unemployment for those making less than $150,000 in 2020 -- the first year of the pandemic -- that was only temporary relief and no such tax break exists for UI received in 2021.

Here's everything you need to know about unemployment benefits for this tax season.

Do you have to pay taxes on unemployment?

Yes. The IRS considers unemployment benefits "taxable income." When filing this spring, your unemployment checks from 2021 will be counted as income, taxed at your regular rate. This applies both to standard unemployment benefits and the expanded benefits that were available to some during 2021.

Unlike traditional employment, where taxes are withheld from your paycheck, you're not required to have federal taxes withheld from your benefit payments. Unless you opted to have taxes withheld, you could end up owing taxes when you file your tax return.

Do you have to pay state taxes on unemployment?

Maybe. If your state of residence collects income taxes, you may have to pay taxes on your benefits to both state and federal governments. That noted, there are a few states that waive unemployment income taxes. They are:

California
Montana
New Jersey
Pennsylvania
Virginia

Indiana and Wisconsin both offer partial exclusions.

How do I know if I already paid taxes on my unemployment benefits?

If you received unemployment insurance this year, you'll receive a Form 1099-G, which shows how much money you received from your unemployment benefits. It will also show whether or not you elected to withhold taxes and, if so, how much was withheld.

How to avoid a large tax bill in the future

Whether or not you decide to withhold taxes from your unemployment benefits depends on your financial situation. If you need the full payment to get by, it may sound appealing to put off paying taxes in the hope of being in a stronger financial situation later on. That noted, it can be devastating to get hit with a big tax bill in the spring.

Your options include making estimated quarterly tax payments in advance, having your taxes automatically withheld from each payment or paying in full when you file your tax return the following year.

Many sole proprietors and freelancers make estimated quarterly tax payments, which lets you spread out what you owe into four annual payments. That noted, because these payments are based on your estimated total income, you could end up paying too much -- resulting in a refund -- or too little -- which would require an extra payment come the April 18 deadline.

To have your unemployment checks taxed like a regular paycheck, you can fill out Form W-4V. Since taxes will be withheld from each payment, it will reduce the amount you receive weekly, but can prevent you from owing a hefty tax bill the following tax season.

We know how difficult unemployment can be. Here’s what you need to know before filing your taxes this year.

Are you recently unemployed due to the coronavirus?

The COVID-19 pandemic caused many businesses to shut down, leaving millions of taxpayers out of work. The Coronavirus Aid, Relief, and Economic Security Act (CARES) was enacted to alleviate the economic fallout of COVID-19. If you applied for unemployment benefits, the CARES Act allows for 13 additional weeks of benefits until December 26, plus an extra $600 a week through July 31, along with the standard amount you will receive. In addition, many states have additional weekly unemployment funds available for qualified unemployed individuals.

How does unemployment affect my taxes?

Unemployment benefits are generally taxable. Most states do not withhold taxes from unemployment benefits voluntarily, but you can request they withhold taxes. If you are receiving unemployment benefits, check with your state about voluntary withholding to help cover your income taxes when you file your tax return. Make sure you include the full amount of benefits received, and any withholdings, on your tax return.

Other factors you’ll need to consider:

I am collecting unemployment – will that impact my income tax?

Unemployment benefits are taxable.
Unemployment compensation is not considered “earned” income for the Earned Income Tax Credit (EITC), childcare credit, and the Additional Child Tax Credit calculations and can reduce the amount of credits you may have traditionally received.

Will I owe taxes because of my unemployment compensation?

Generally, states don’t withhold taxes on unemployment benefits unless asked.
However, if you qualify for EITC, or the child tax credits, your taxes could be covered.
You can do a year-end tax checkup to see if you have enough credits and withholding to cover your taxes. You may still have time to make adjustments to lower your shortfall.
If you are still unemployed come 2021 tax time, you can set up a payment plan with the IRS or work out other delayed payment options.
The IRS assesses penalties on the balance owed when you file and when you pay late they also compound interest on the full bill daily. The IRS has programs that may forgive your tax penalties. If you qualify, this will also help reduce your interest and lower your overall tax bill.
Make sure you file your tax return on-time, even if you can’t pay. In the short-term, the penalties for filing late are higher than the penalties for paying late.

How do I deduct my job-hunting expenses?

Job-hunting expenses such as travel, cost of job placement companies, resume costs, etc. are no longer deductible.
Moving expenses are also no longer deductible unless you are active-duty military moving under military orders.

Are government benefits taxable?

Check with your local benefits offices; you may be eligible for state and federal benefits due to the change in your income. Benefits such as SNAP, housing subsidies, childcare subsidies, and many others are generally not taxable. Gifts from various organizations, such as local food pantries and utility and gas programs are usually tax-exempt.

Do I have to claim my severance pay on my tax return if I already paid taxes?

Severance pay is a lump-sum payment received from a company when you are terminated due to job closings, company reductions, or even company closures. These payments are typically based on time in service and/or job performance, and as such are taxable as wages. This payment will have the usually Social Security, Medicare, federal and state taxes withheld, which will be reflected on your W-2.

I lost my health insurance when I lost my job, do I have to pay a penalty?

The penalty for not having health insurance is $0 on the federal return for all taxpayers.
Certain states do penalize taxpayers who don’t have health insurance coverage and don’t meet an exemption.

Tax File Minute: Answers from a Tax Insider

Are unemployment benefits taxable?

Chief Tax Information Officer Mark Steber discusses what you need to know about unemployment benefits and taxes.

Will the IRS take my refund if I owe unemployment?

Yes. Unpaid debts include past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or certain federal nontax debts, such as student loans. If the refund is offset to pay unpaid debts, a notice will be sent to inform you of the offset.

Who can take your tax refund?

Federal law allows only state and federal government agencies (not individual or private creditors) to take your refund as payment toward a debt.

Will tax refunds be garnished in 2022?

But thanks to the latest student loan relief rules, your tax refund won't be taken in 2022 for past due student loan payments. Federal student loan payments and loans in collections are still on administrative pause.

How do I stop the IRS from taking my refund?

Keep the IRS from taking your refund with an IRS hardship refund request. You must prove that you are facing financial hardship and need the refund for a key purpose, such as buying food for your family, paying for gas so you can get to your job, continuing your education, and so on.