Unemployment Compensation

Millions of American taxpayers struggling to find steady work receive unemployment benefits. The unemployment compensation program is carried out jointly by both federal and state governments. While federal laws dictate the program’s structure and procedures, state governments implement the program on a local level. Both levels of government raise revenue for the program by imposing special taxes on employers.

The unemployed Americans receiving these benefits have a responsibility for utilizing the program; they must pay federal taxes on a majority of the benefits they receive. Accordingly, any taxpayer receiving unemployment compensation assistance will be issued a Form 1099-G. Box 1 of the Form lists the total amount of unemployment compensation paid to the taxpayer. Taxpayer’s must report this amount on Line 19 of Form 1040. There are, however, four exceptions to the general rule of taxing benefits. Taxpayers may reduce their Line 19 taxable compensation by the any dollar amount that the taxpayer:

-contributed to a governmental unemployment compensation program (so long as taxpayer is not itemizing deductions)
-contributed to a government-funded family leave program (so long as taxpayer is not itemizing deductions)
-repaid to the IRS following an Unemployment Compensation overpayment by the IRS in 2012. (taxpayer should write “Repaid” as well as the amount repaid on the dotted line next to Line 19)
-repaid1 to the IRS during 2012 after including the amount as gross income in an earlier year (taxpayer must itemize deductions, listing this deduction on Line 23 of Schedule A)

1if the repayment exceeded $3,000, see Publication 525 (Repayments section) for details on how to report large repayments

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