Unemployment Compensation is an amount received by a taxpayer, originating from the United States or a State.

Unemployment Compensation in the United States

In the United States, this compensation is classified as a type of social welfare benefit. According to the Internal Revenue Code, these types of benefits are to be included in a taxpayer’s gross income. The argument for taxation of social welfare benefits is that they result in a realized gain for a taxpayer. The Internal Revenue Service (IRS) is the United States government agency that collects taxes and enforces the tax laws. ...

In the United States, this particular type of payment is unique in the fact that it arises from government resources. As a result, issues arrived over the taxability of such payment. With Revenue Ruling 71-425, the IRS deemed Unemployment Compensation amounts excludable based on certain conditions.

Conditions for exclusion:

• Source of payment is a governmental unit or welfare fund; and
• Reason for payment is in the interest of general welfare.

Essentially, nearly identical economic inflows were being taxed differently. In an attempt to provide uniformity and clarity to taxpayers, congress established Code Section 85. Section 85 superseded the previous Revenue Ruling making Unemployment Compensation includable in gross income.

The criteria for inclusion included:

• Recipient must be an individual; and
• Source of payment is unemployment compensation.