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.
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. Most unemployment claims are now processed online, and withholding elections can be made there as well. Please visit your state’s unemployment website for your specific situation.