Millions of unemployed Americans face surprise tax bills since benefits count as taxable income

America has an unemployment problem as millions are currently without jobs. A lot of these people depend on the government’s unemployment benefits to sustain themselves until they find their next opportunity. Unfortunately, it seems like even unemployment benefits in the country are subject to tax, meaning that millions could be left with tax bills that they are simply not prepared for. The scary part is that most Americans are unaware that unemployment benefits are considered taxable income.

The US Sun reports that 1.83 million Americans received unemployment benefits as of late February 2026. They’re handed out by states to people who lost their jobs through no fault of their own. However, the IRS and some states consider this to be taxable income. Hence, those who did not have taxes withheld from their benefit check might have to face a hefty tax bill when they file their return ahead of the April 15 deadline.

Unemployment insurance is considered taxable income as per the report, and it must be declared to the IRS. The rate for an unemployed individual depends on all of their income sources for the year, including the benefits. However, one can withhold taxes on unemployment insurance voluntarily. This means that they must opt in to have taxes taken out of their benefits. People can also elect to have flat 10% withheld by submitting IRS Form W-4V, Voluntary Withholding Request, to their state agency.

On the other hand, Americans residing in states with their own tax forms need to submit those instead. However, it is important to note that this 10% might not cover one’s tax liability entirely, especially if they have earned money from sources apart from unemployment benefits. Those who have not paid taxes on unemployment benefits throughout the year could also face a penalty when they file this year.

While most states require unemployment beneficiaries to pay state taxes, there are some exceptions. This is not the case in Alaska, Florida, Washington, Nevada, New Hampshire, Wyoming, South Dakota, Texas, and Tennessee. These states do not charge income taxes, meaning that unemployment benefits are also tax-free. There are also some states where unemployment benefits are not considered to be taxable income. These are Alabama, California, Montana, New Jersey, Pennsylvania, and Virginia.

Naturally, citizens were not happy when they learned about this on social media, and some even made their discontent clear under a Facebook post. “All of them are theft,” one user commented, while another quipped, “Ok, now I’m trying not to panic about this." Meanwhile, a third user wrote, “If you owe unemployment, they’re taking your tax refund."

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