Most forms of income are subject to taxation in the United States. Even if you were officially unemployed during the tax year, the money you received in unemployment benefits is considered ordinary income for tax purposes.c  Since your unemployment benefits are likely significantly lower than your prior income levels, you may be in a different tax bracket than in prior year filings.c 

Unemployment benefits are administered by state labor departments for employees who were released from their job by no fault of their own. Individuals fired with cause are generally not eligible for unemployment benefits. The amount of benefits provided is calculated as a percentage of your prior wage level. Benefits are provided for a specified period of time that can change based on legislation initiatives and your completion of active job search activities.c 

Look for Form 1099-G in your mailbox in January or early February. If you have moved and did not update your records, you may need to contact the processor for your unemployment benefits to receive your documentation. Form 1099-G will summarize all of the benefits you received during the year.c 

Analyze the form in its entirety. While errors tend to be rare, they can occur. Look at your name, social security number and other demographic information for potential errors. Calculate the total benefits you received by adding your individual payments.c  Compare your calculated total to the total listed on Form 1099-G for accuracy. If your benefits were deposited in your bank account directly, you may be able to quickly summarize your benefit totals from online or paper bank account statements.

Take the information listed on your unemployment benefits statement and insert it into your tax preparation software program, online tax service or provide it to your tax preparer. Your unemployment earnings are entered on line 3 for Form 1040EZ, line 19 on a 1040 and line 13 on form 1040A.c 

If your adjusted gross income is below an established income ceiling ($58,000 for the 2010 tax year), you may qualify for a free filing service as outlined on the IRS.gov website. Regardless of your preparation method, compare the final totals on your tax forms to your original 1099-G for accuracy.c