Believe it or not, the IRS and most states treat unemployment as taxable income. This means that you have to pay tax on these payments and report them on your return. With the new American Rescue Plan, if your modified adjusted gross income (MAGI) is less than $150,000, the first $10,200 of unemployment will be tax free, per taxpayer on your federal return, but any amount you receive above that will be taxed.
Here is an example of how your income is calculated:
You and your spouse received $140,000 in wages. You received $15,000 in unemployment and your spouse received $5,000 in unemployment, which makes your MAGI $160,000. To calculate whether you qualify for the exclusion, it would be $160,000 MAGI minus $10,200 for you and minus $5,000 for your spouse, which equals $144,800. Since your MAGI is under $150,000, you qualify to take the exclusion. The IRS also has an unemployment compensation worksheet to calculate your amount.
Check to see if your state is also following the same guidelines.
As part of entering all your sources of income in TurboTax, enter your unemployment income from Form 1099-G. We'll figure out how much of your unemployment income (if any) is taxable by the IRS and your state.
Keep in mind: If you're still collecting unemployment, fill out Form W-4V, Voluntary Withholding Request to have 10% withheld for your federal taxes so your tax bill won't be as high next year. After printing and signing the form, make a copy for your records and send the original signed form to your state unemployment office.