Most taxpayers will receive their unemployment refunds automatically, by direct deposit or paper check. They don't need to file an amended tax return. Like salaries, unemployment benefits are counted as part of your income and must be reported on your federal tax return. Unemployment benefits may or may not be taxed on your state tax return, depending on where you live.
In any case, you must pay federal taxes on your unemployment benefits. In short, yes, unemployment income is taxable. Depending on where you live, your city or county may also tax your unemployment benefits at the local income tax rate. Contact your state's unemployment office (opens in a new tab) to have federal income taxes withheld from your unemployment benefits.
The IRS will automatically adjust your tax return if you qualify for the unemployment tax exemption, which may affect your eligibility for the earned income tax credit, the additional child tax credit, the American Opportunity tax credit, the premium tax credit and the recovery refund credit listed on your tax return. The IRS is also sending notices to some taxpayers who may now qualify for the child tax credit; taxpayers who respond to the notice do not have to file an amended return. However, this is not the case for all credits and deductions, such as the recovery refund credit, the premium tax credit, or the earned income tax credit without qualifying children; the IRS will automatically calculate and send payments in these cases. The new electric vehicle tax credit has raised concerns that Kia and Hyundai electric vehicles won't qualify without some flexibility.
Taxpayers don't need to file an amended return unless the calculations make the taxpayer eligible again to receive additional federal credits and deductions that aren't already included on the original tax return. Because the change occurred after some people filed their taxes, the IRS will take steps in the spring and summer to make the appropriate change to their return, which may result in a refund. That said, most taxpayers will need to file an amended return if they didn't originally apply for the tax credit or other credits, such as the additional child tax credit, but are now eligible because the exclusion changed their income, according to the IRS. You have the same option of withholding taxes as unemployment income, but it doesn't apply automatically.
Reap benefits and thrive with Kiplinger's best expert advice on investing, taxes, retirement, personal finance and more, right in your email. For example, the IRS can adjust the returns of taxpayers who applied for the Earned Income Tax Credit (EITC) and, since the exclusion changed the income level, they may now be eligible for an increase in the EITC amount, which could result in a larger refund. If your state decided to grant you a state tax exemption and you've already filed your state return, you should check if you're recently eligible for a state tax credit. Before coming to Kiplinger, he worked for Wolters Kluwer Tax & Accounting and Kleinrock Publishing, where he provided breaking news and guidance for public accountants, tax attorneys and other tax professionals.