The 1099-G, explained: it reports payments from a government agency. Box 1 is unemployment compensation, Box 2 is a state or local income tax refund, credit or offset, and Box 6 is a taxable grant. Unemployment is reported as income. A Box 2 refund is taxable only if the client deducted that state income tax on an earlier return.
The 1099-G boxes: unemployment, state refunds and grants
The 1099-G boxes split government payments by type. Box 1 is unemployment, Box 2 a state or local income tax refund, Box 3 the year that refund belongs to, Box 4 withholding, Box 6 taxable grants and Box 7 agriculture payments. One client can get two 1099-Gs from two agencies.
The IRS Instructions for Form 1099-G (Rev. December 2026) describe each box:
- Box 1, unemployment compensation: "payments of $10 or more in unemployment compensation, including Railroad Retirement Board payments for unemployment."
- Box 2, state or local income tax refunds, credits or offsets: refunds, credits or offsets "of $10 or more."
- Box 3, Box 2 amount is for tax year: blank when the refund is for the current tax year; otherwise it names the earlier year.
- Box 4, federal income tax withheld: voluntary withholding on unemployment, or backup withholding on Box 5, 6 or 7 payments.
- Box 6, taxable grants: "any amount of a taxable grant administered by a federal, state, or local program."
- Box 7, agriculture payments: "USDA agricultural subsidy payments made during the year."
Box 8 is a checkbox for a Box 2 refund of a tax that applies only to business income, and Box 9 is market gain on certain farm loans. Most individual clients see only Boxes 1, 2 and 4.
Unemployment goes on Schedule 1. The IRS Instructions for Form 1040 (2025) say to report the Box 1 total on line 7, and that if Box 1 is wrong, "report on line 7 only the actual amount of unemployment compensation paid to you in 2025." Federal tax withheld from unemployment goes in the total on Form 1040, line 25b.
Amounts withheld from wages for state programs are a separate topic, read from the W-2 rather than the 1099-G. Employer-labeled items are covered in W-2 Box 14, and the coded amounts in Box 12 are explained in W-2 Box 12 codes.
Is the state refund on a 1099-G taxable?
The state refund on a 1099-G is taxable only to the extent the client got a tax benefit from deducting that state income tax in the earlier year. The 2025 Form 1040 instructions say none of it is taxable if the client did not itemize that year or chose to deduct general sales tax instead of income tax.
IRS Publication 525 (2025) states the underlying tax benefit rule: "You must include a recovery in your income in the year you receive it up to the amount by which the deduction or credit you took for the recovered amount reduced your tax in the earlier year." The Form 1040 instructions turn that rule into a worksheet for a refund of the prior year's tax, with Pub. 525 handling the exceptions.
Decision steps for a Box 2 refund on a 2025 return
The steps follow the State and Local Income Tax Refund Worksheet in the 2025 Form 1040 instructions. They describe what the worksheet asks, not how to treat a given client.
- Is Box 3 blank or 2024? If Box 3 names another year, the instructions send you to Itemized Deduction Recoveries in Pub. 525 instead of the worksheet.
- Did the client itemize on the 2024 return? If no, the result is not taxable. The instructions say none of the refund is taxable if, in the year the tax was paid, the taxpayer "didn't itemize deductions."
- Did the 2024 Schedule A deduct state income tax, or general sales tax? If sales tax, the result is not taxable. If income tax, continue.
- Was the 2024 deduction limited by the state and local tax cap? The worksheet compares 2024 Schedule A line 5d with line 5e, the capped amount. If line 5d was not more than line 5e, carry the full refund forward. If it was more, subtract line 5e from line 5d. If the refund is not more than that excess, the result is not taxable. If it is more, only the difference carries forward.
- How far did itemized deductions exceed the standard deduction? The worksheet compares 2024 Schedule A line 17 with the 2024 standard deduction plus any age or blindness amounts. If itemized deductions were not more, the result is not taxable. If the refund left after step 4 is no more than the excess, that remaining refund is taxable. If it is more, the result is partly taxable, limited to the excess.
An example: fictional client Lena Example deducted $14,800.00 of state and local taxes on her 2024 Schedule A line 5d, capped at $10,000.00 on line 5e, and received a 2025 1099-G with a $1,250.00 Box 2 refund. The $4,800.00 excess over the cap is more than the refund, so under step 4 the refund is not taxable. The cap had already removed the benefit the refund would otherwise take back.
Publication 525 also covers clients who chose between the two taxes. Its Example 26 limits the taxable refund to "the excess of the tax you chose to deduct for that year over the tax you didn't choose to deduct." Last year's return holds every figure these steps need, which is why the prior-year return as a checklist belongs next to the 1099-G.
What if a client gets a 1099-G for unemployment never claimed?
A client who gets a 1099-G for unemployment never claimed may be a victim of identity theft, and the fix runs through the state agency. The IRS says to report the fraud to the state, ask for a corrected 1099-G, and report only income the client actually received, even if the correction has not arrived.
The 1099-G instructions carry a caution: "States have experienced a surge in fraudulent unemployment claims. Criminals are engaging in identity theft (IDT) to fraudulently collect benefits across multiple states."
The IRS page Identity theft and unemployment benefits (June 2026) gives the steps. Report the fraud to the state agency that issued the form, using the Department of Labor's state contact list, and request a corrected 1099-G. When filing, "ONLY include income you received," and "Do not report the incorrect 1099-G income on your tax return." The page also says "There is no requirement to file a Form 14039, Identity Theft Affidavit," unless an e-filed return is rejected because a return using the client's number is already on file, or the IRS asks for one.
Keep a copy of the client's report to the state and any reply in the file. If an IRS notice follows the return, those records explain the gap between the 1099-G and line 7.
Finding a 1099-G the state never mailed
A 1099-G the state never mailed may be waiting in the client's online account with the state agency. A state can post unemployment and refund forms electronically instead of mailing them. The 2025 Form 1040 instructions say to report a taxable refund or unemployment even when no 1099-G arrived.
The 2025 Form 1040 instructions are direct on both boxes. For refunds: "Your 2025 Form 1099-G may have been made available to you only in an electronic format," and "Report any taxable refund you received even if you didn't receive Form 1099-G." For unemployment: "your state may issue an electronic Form 1099-G instead of it being mailed to you. Check your state's unemployment compensation website for more information." Publication 525 repeats the point for unemployment.
Two accounts are worth checking: the state tax department's portal for a Box 2 refund, and the state unemployment agency's portal for Box 1. A client who received both may need to download from two places. If last year's return shows a state refund on Schedule 1, line 1, expect a 1099-G this year too.
Schema CPA reads the 1099 series and compares each client's folder with last year's return, so a 1099-G that came in last year and has not arrived this year is flagged as missing. The client tracker demo shows that check, and firms can get started free. For pulling figures off many 1099s, see 1099 OCR.