Unemployment and state refunds on a 1099-G
Box 1 unemployment is taxable and usually has no withholding. Box 2 state refunds often are not taxable. And what to do about a form for benefits you never got.
Quick answers
- Is unemployment taxable?
- Yes, on a federal return. The full box 1 amount goes on Schedule 1 and is taxed at your ordinary rates, and withholding on benefits is voluntary, so a year with several months of benefits can end in a balance due.
- Do I have to report the state refund in box 2?
- Only if you itemized in the year you paid that tax and actually got a benefit from deducting it. If you took the standard deduction, box 2 is not income and does not go on the return at all.
- What do I do about a 1099-G for benefits I never received?
- Report the fraudulent claim to the state agency that issued the form and ask for a corrected one, then file an accurate return showing only the benefits you actually received. Keep a written record of the request.
A 1099-G reports money a government paid you. Two boxes account for nearly every one that arrives in a mailbox, and they work in opposite directions: box 1 is almost always taxable, and box 2 usually is not.
Box 1: unemployment compensation
Unemployment benefits are taxable income on a federal return. The full amount in box 1 goes on Schedule 1, and it is taxed at your ordinary rates like wages.
What it does not carry is an employer holding tax back for you. Withholding on unemployment is voluntary, and many people who file a claim never see the option. If nothing was withheld, the tax on those benefits is unpaid until you file, and a year with several months of benefits can end in a balance due even though your total income fell.
You can ask for withholding while you are receiving benefits by giving the state agency Form W-4V. The federal rate for unemployment on that form is 10%, and it is the only federal rate the form offers for these payments. If you did not withhold and you know benefits are coming, the other route is estimated payments during the year.
States differ on whether they tax these benefits, so box 11 and the state boxes on the form are worth reading, not skipping.
Box 2: a state or local income tax refund
Box 2 is the refund of state or local income tax you got last year. It is taxable this year only if you itemized deductions in the year you paid that tax and actually got a benefit from deducting it.
If you took the standard deduction, box 2 is not income and does not go on the return at all. Because most households take the standard deduction, most 1099-G box 2 amounts change nothing.
Even for an itemizer, the answer is often only partly taxable. The state and local tax deduction is capped at $40,000, and if your state and local taxes ran above the cap, the refunded dollars may not have produced any deduction in the first place. Box 3 tells you which tax year the refund relates to, which is what your preparer needs in order to look back at that year's return and work it out.
The other boxes
The rest of the form covers payments people receive less often. Box 6 is taxable grants, including some state and local business or energy grants. Box 7 is agriculture payments. Box 5 is reemployment trade adjustment assistance. Box 4 is any federal tax already withheld from any of these, and it counts as a payment on your return.
A form for benefits you never received
Criminals file unemployment claims in other people's names, and the state pays out to them. The victim finds out when a 1099-G shows up for benefits they never saw.
The IRS position is that you file an accurate return reporting only the benefits you actually received, even if the corrected form has not arrived by then. Do not report the fraudulent amount and do not attach the incorrect form. The IRS also says a taxpayer in this situation does not need to file an identity theft affidavit with the IRS for the unemployment claim itself, because the fraud happened at the state agency.
Two further steps are worth taking while you are at it. Tell your employer, since fraudulent claims are often filed against a current employer's account. And check your credit reports, because a claim filed in your name means someone had enough of your information to try.
Putting it together
- Check the name, Social Security number and amounts on every 1099-G against your own records.
- For box 1, confirm whether anything was withheld and whether you need to change withholding or estimated payments for the current year.
- For box 2, find out whether you itemized in the year shown in box 3 before assuming any of it is taxable.
- For a form you do not recognize at all, contact the issuing agency in writing and file on time with the correct figures.
If unemployment ran for part of the year and wages for the rest, this is also a good moment to hand your employer a new W-4. Benefits with no withholding and wages withheld on the assumption of a full year of pay tend to pull in opposite directions, and the correction is easier made during the year than after it.