Is unemployment compensation taxable in Alabama?

Federal income tax applies to what you draw. Alabama income tax does not, so the only withholding worth thinking about is the federal kind, and the only form you will be handed is the one the IRS wants.

Having federal tax held back

Since January 1, 1997, you have had the option of having federal withholding taxes taken out of your unemployment payments, at a current rate of 10 percent.

The law also fixes what you must be told when you file. At the time you file an initial claim, the department has to tell you that unemployment compensation is subject to federal income tax, and that requirements exist around estimated tax payments. It also has to tell you that you may elect to have federal income tax deducted and withheld at the amount the federal Internal Revenue Code specifies. A withholding status you have already elected may be changed one time within a benefit year.

What a benefit year is, and when yours ends, sits on how long benefits last.

Alabama does not tax the benefit

The Alabama Department of Revenue's own instruction booklet for the resident income tax return lists unemployment compensation among the income you do not report on an Alabama return. Nothing comes off your payments for state tax, because Alabama has no tax on them to withhold.

If you have claimed in another state before, the state tax line on your return is where Alabama differs. The booklet's list carries no cap and no conditions against it.

Severance pay follows a separate rule

Alabama exempts severance pay from state income tax up to $50,000 where the job was lost through administrative downsizing, and where the severance came to less than $50,000, only the amount actually received is exempt.

That exemption is about money your employer paid you on the way out. Ordinary unemployment compensation is exempt from Alabama income tax whatever it adds up to, so the $50,000 figure is not a ceiling on what you can draw.

Your Form 1099-G

Alabama reports what it paid you on a Form 1099-G, Certain Government Payments. Box 1 carries the unemployment compensation paid to you during the year, and Box 4 carries any federal income tax withheld, which is where a withholding election shows up.

For the 2024 tax year, the department mailed the form to each claimant's address of record by January 31, 2025, as the law requires, and also made it available to download. The form goes to the address the department holds for you, so call 1-800-361-4524 to check or update it.

Questions about a form you received, or a form that never came, go to the treasurer's office. Email Treasurer@workforce.alabama.gov or call 334-956-5874.

A 1099-G for a claim you never filed

Alabama directs a taxpayer who is a victim of identity theft to the IRS pamphlet Identity Theft Information for Taxpayers, and says plainly that this covers anyone who received a Form 1099-G but did not receive unemployment benefits. The pointer sits on the department's fraud and abuse reporting page.