Tax Breaks on Unemployment Benefits: What Changed Since 2009

If you received unemployment benefits, you may have heard about special tax rules that once allowed recipients to exclude a portion of that income. The most well-known example originated with the 2009 stimulus package, which temporarily changed how unemployment compensation was taxed.

The 2009 Unemployment Tax Exclusion

Under the American Recovery and Reinvestment Act of 2009, the first $2,400 of unemployment benefits received during that tax year was excluded from federal taxable income. For married couples filing jointly, each spouse could exclude up to $2,400 from their own respective benefits. This provided a targeted tax break for individuals who had lost their jobs during the financial crisis.

Is the Exclusion Available Today?

No. The $2,400 exclusion was a temporary measure specifically for the 2009 tax year. It was not renewed for subsequent years. Under standard, long-term IRS rules, unemployment compensation is considered taxable income at the federal level and must be reported on your tax return.

A Brief Return in 2020

The concept returned briefly over a decade later. Under the American Rescue Plan Act of 2021, taxpayers were allowed to exclude up to $10,200 in unemployment benefits received in 2020. Much like the 2009 rule, this was a temporary provision that did not extend to benefits collected in 2021 or later.

How to Handle Unemployment on Your Taxes

If you are preparing your books or filing taxes for a year where no special exclusion is in effect, you must report all unemployment income. Payors issue Form 1099-G to report these payments. If you use tax preparation software like TurboTax, the program will automatically calculate your taxable benefits once you enter the details from that form. To avoid an unexpected bill at tax time, consider requesting voluntary federal tax withholding from your unemployment payments.