Congress wants to waive the tax on unemployment. Some states may not

Congress may soon be offering a tax break to unemployed Americans. States may not be that generous.

The Senate passed a $ 1.9 trillion Covid bill on Saturday, waiving taxes on up to $ 10,200 in unemployment benefits per person received in 2020.

President Joe Biden is expected to sign the legislation this week after it is passed by the Democrat-led House of Representatives.

But the tax policy, which applies to households earning less than $ 150,000, is just a break from federal employee income taxes.

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More than half of the states impose an income tax on unemployment benefits. If Congress waives federal income tax, states must decide whether to offer the break as well.

Some may still choose to tax unemployment benefits, experts said.

As an example, suppose an employee received $ 10,000 in benefits last year. That person would still pay a $ 500 tax bill in states with a 5% income tax (assuming a flat tax rate).

“It’s complex,” said Jared Walczak, vice president of state projects at the Tax Foundation. “Even many government officials are probably unsure of what will happen next.”

Federal policy aims to prevent an unexpected tax bill for the unemployed.

Last year, about 40 million people received unemployment benefits and the average person received $ 14,000 in aid, according to a report by The Century Foundation.

However, less than half of recipients had withheld taxes, the report said. In some cases, states did not offer the option.

But the relief law now changes the rules in the middle of the tax season, which began on Feb. 12 and ends on April 15.

This has confused taxpayers, accountants and policymakers.

According to Walczak, thirty-five states and the District of Columbia typically tax unemployment benefits as income.

Three states – Maryland, Arkansas, and Delaware – usually do, but waived tax on benefits received in 2020.

The remaining states do not tax unemployment benefits – because they have no income tax or because they exempt unemployment benefits.

State legislators have to decide how to proceed, and their decision is time sensitive. Many laid-off workers may wait to file their taxes until there is more clarity.

There is precedent in the policy for tax waiver on unemployment income. In 2009, during the Great Recession, Congress exempted the first $ 2,400 in unemployment benefits from tax, and many states followed suit, Walczak said.

However, that rule change didn’t happen during tax season, he said.

Many state lawmakers may find it difficult to pass the change, as they have already included tax revenues in budget estimates for the current fiscal year, said Verenda Smith, deputy director at the Federation of Tax Administrators, who works with tax officials. of the state.

States may need to get money from other budget areas, such as education, to make up for this, she said.

“It’s not easy to go along with this,” said Smith. “It’s a tough, tough budget decision for them to make.”

However, it wouldn’t be surprising if many states eventually adopted federal tax policy, given the level of financial pain among Americans, she added.

According to data from the Labor Office, more than 18 million people still receive unemployment benefits.

“Something like this pulls people’s hearts,” Smith said. ‘It would be very difficult for an elected official to vote against such a thing.

“That’s just the political reality,” she added.

It is likely that taxpayers who received unemployment benefits last year and have already filed their tax returns will have to file an amended return in the future.

But they should wait to do this until the U.S. bailout becomes law and there is more clarity from the IRS, the Treasury Department and respective states, experts said.

The IRS allows up to three years from the original filing date to file an amended return and request a refund.

Employees who have not yet filed a declaration should consider requesting an extension of the filing deadline, according to experts.

If you do, they will not be exempt from paying tax before the April 15 tax term. They must estimate and pay any tax due to avoid penalties.

But it gives extra time to see what state and federal lawmakers decide to do.

If the unemployment tax exemption becomes law, those applying for an extension will be able to omit unemployment benefits (up to $ 10,200) from their income when estimating their federal tax liability for 2020, Walczak said.

But in states that tax unemployment income and have not yet issued advice on new federal rules, workers should not deduct the benefits when estimating state tax, if they want to be conservative, he added.