$10,000 of unemployment benefits costs nothing in California and $594 in Wisconsin

Take a single filer with $65,000 of wages who also collects $10,000 of unemployment benefits in tax year 2026 (the return filed in 2027). The benefits add $0 to her state tax in California, New Jersey, Pennsylvania, Virginia, Alabama and the District of Columbia. They add $594 in Wisconsin, $295 in Indiana before county tax, and $565 in Montana. The federal return taxes all of it.

Federally, every dollar is income

Internal Revenue Code §85(a) is one sentence: "In the case of an individual, gross income includes unemployment compensation." The state agency reports the year's payments in box 1 of Form 1099-G, and the total goes on Schedule 1, line 7. The pandemic exclusion of up to $10,200 lived in §85(c) and applied to taxable years beginning in 2020 only.

For our filer, the arithmetic runs off the 2026 single schedule in Rev. Proc. 2025-32. Her $65,000 of wages less the $16,100 standard deduction leaves $48,900 of taxable income, $1,500 below the point where the 12% bracket ends at $50,400. The benefits fill those $1,500 at 12% ($180), and the other $8,500 lands at 22% ($1,870). By the rate schedule, $10,000 of benefits adds $2,050 of federal tax. The IRS Tax Table, which taxes the midpoint of each $50 band, gives $2,053.

Form W-4V withholds a flat 10%

Withholding from benefits is voluntary. A claimant who wants it files Form W-4V with the paying agency and checks line 5, and the rate is fixed: "the payer is permitted to withhold 10% from each payment. No other percentage or amount is allowed." On $10,000 that is $1,000. Our filer's added federal tax is $2,050, so a W-4V election leaves her $1,050 short in April 2027 even if her W-2 withholding was exact. The 7%, 12% and 22% choices on line 6 belong to Social Security and the other payments listed there, not to unemployment.

The jurisdictions that take it all back out

Each of these starts from federal income or its own income definition and leaves the 1099-G amount out of the state's tax. The last column is what the exemption is worth to our filer: the state tax her $10,000 would have added under that state's own 2026 schedule, computed from our tables.

California, New Jersey, Alabama and the District carry provisional 2026 data in our tables: their 2026 schedules are not yet final, so those four dollar figures can still move. Pennsylvania and Virginia are final.

California reports the benefits in column A of Schedule CA and subtracts them in column B. The FTB's own instruction for that line is a single sentence: "California excludes unemployment compensation from taxable income."

New Jersey never adds them in. The Division of Taxation lists unemployment compensation among the items of income not subject to New Jersey tax, on the same list as Social Security and temporary disability benefits.

Pennsylvania keeps them out of compensation, the class of income that wages fall in. The Revenue Department's definition of taxable compensation excludes "public assistance or unemployment compensation payments by any governmental agency," and its guide lists unemployment compensation under income never taxable as compensation. The Department of Labor & Industry's claimant guide goes one level further: the benefits "are not taxable by the Commonwealth of Pennsylvania and local governments," so no Pennsylvania locality taxes them either. At the flat 3.07% state rate, the exemption is worth the least of the six.

Virginia subtracts, "to the extent included in federal adjusted gross income," the items listed in §58.1-322.02, and subdivision 17 is "Unemployment benefits taxable pursuant to § 85 of the Internal Revenue Code." The subtraction is tied to §85 by name, so it removes what the federal return taxed and nothing more.

Alabama puts "Unemployment compensation" on the booklet's list of income you do not report, the same list that carries Social Security and military retirement.

The District excludes them under §47-1803.02(a)(2)(LL), which covers unemployment insurance benefits paid by the District or any other state, federally funded extensions included, for taxable years beginning after December 31, 2020.

Indiana and Wisconsin: a break that ends at $32,000

Both states use the same formula, and a full-time earner gets nothing from it. In each, the taxable share of benefits is the smaller of the benefits themselves or half of federal AGI above a base of $12,000 for a single filer ($18,000 joint). Only what is left over is subtracted: Indiana on Schedule 2, line 10, Wisconsin on Schedule SB, line 3 under sec. 71.05(6)(b)8., Wis. Stats. (Wisconsin DOR).

Our filer's federal AGI is $75,000. Less $12,000 is $63,000; half is $31,500. The smaller of $31,500 and her $10,000 of benefits is $10,000, so all $10,000 is taxable and the subtraction is zero. In either state the subtraction runs out entirely once AGI reaches $12,000 plus twice the benefits, which for $10,000 of benefits is $32,000. A single filer whose only income was $10,000 of benefits has AGI under the base and subtracts all of it. One with $25,000 of AGI, $10,000 of it benefits, has $6,500 taxable and subtracts $3,500.

Wisconsin's worksheet takes taxable Social Security and taxable state refunds out of AGI before the comparison (its lines 4 and 5); Indiana's uses federal AGI as reported. A Wisconsin couple filing separately who lived together at any point in the year gets a base of $0.

For our filer the benefits cost $594 in Wisconsin and $295 in Indiana, the latter at the flat 2.95% state rate only. Indiana's counties levy their own income tax, figured on Schedule CT-40 and entered on line 9 of the same IT-40. Our tables do not carry county rates, so the Indiana figure leaves it out.

Both worksheets quoted here are the 2025 editions, the latest each state has published as of October 2026.

Montana repealed its exclusion in 2024

Montana once let filers subtract unemployment compensation. Senate Bill 399 (2021) moved the Montana return's starting point from federal adjusted gross income to federal taxable income for tax years after December 31, 2023, and the Department of Revenue lists unemployment compensation first among the "Repealed deductions as of 1/1/24". From tax year 2024 on, benefits flow into Montana income with the rest of federal taxable income, and in 2026 they cost our filer $565.

Form W-4V is a federal form, and the only withholding it can request is the federal 10%. A Wisconsin claimant with our filer's numbers who checked line 5 and arranged nothing else reaches April 2027 owing $1,050 to the IRS and $594 to Wisconsin on the same $10,000. In Virginia the state line of that bill is $0, and the federal $1,050 is the same.