All unemployment compensation benefits are fully taxable.
- When claiming your unemployment benefits, you can choose to have 10 percent of your unemployment payment withheld to help pay your federal taxes. You can also withhold your state income taxes.
- Although withholding is voluntary, it is beneficial because it eliminates the need to make estimated tax payments.
- You may also qualify for the Earned Income Credit if a job was lost during the course of last year and you experienced a drop in income, and you meet all requirements to claim the credit. This credit is worth up to $5,751 for 2011 and even a taxpayer who never claimed this credit in the past could be eligible.