Despite Relief Bill, Some States Won't Give Jobless Workers a Tax Break on Unemployment Benefits

by Maurie Backman | Updated July 25, 2021 - First published on April 3, 2021

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The new coronavirus relief bill exempts unemployment income at the federal level. States are a different story.

The American Rescue Plan -- the sweeping $1.9 trillion coronavirus relief bill that was signed into law in mid-March -- came with a host of provisions designed to provide meaningful aid to struggling Americans. In addition to $1,400 stimulus checks, the bill boosted unemployment benefits by $300 a week through early September.

And that's not the only change the plan made to unemployment benefits. The bill also allows people to get their first $10,200 in unemployment benefits free of federal taxes. Those who paid taxes on those benefits already could be in line for a substantial refund with this year's tax returns.

But while many jobless workers will get to enjoy that federal tax relief, some states aren't letting them off the hook so easily. In fact, a number of states won't let tax-filers exclude that $10,200 from their 2020 income.

The list of offenders

States get to set their own rules when it comes to state taxes. That's why different states have different income tax rates, and some, like Florida, don't charge income tax at all.

Despite the federal exemption on jobless benefits, these states will continue to count that $10,200 as income for tax purposes:

  • Colorado
  • Georgia
  • Hawaii
  • Idaho
  • Kentucky
  • Massachusetts
  • Minnesota
  • Mississippi
  • New York
  • North Carolina
  • Rhode Island
  • South Carolina
  • West Virginia

So why are the remaining states adopting the tax exemption? For some, it's a matter of throwing jobless workers a bone during these trying times. Other states don't tax income at all, as mentioned above, and that extends to unemployment benefits. And some states, like Indiana and Wisconsin, offer a partial tax break on benefits.

It's also important to keep in mind that not everyone will get a federal tax break on $10,200 in unemployment income. That provision only applies to tax-filers whose income is less than $150,000.

What's more, the average person on unemployment received $14,000 in benefits last year. People in that boat will still pay taxes on some of their unemployment income -- just not all.

Prepare for a state tax bill

If you got unemployment income last year and your state isn't offering a tax break on your first $10,200 of benefits, you may need to gear up for a tax bill when you file your state income taxes this year. Colorado, for example, charges a tax rate of 4.63%, so for $10,200 in unemployment benefits, that's a $472 payment. And some states have much higher tax rates.

At a time when so many people are struggling financially -- especially those who are out of work and reliant on unemployment income to make ends meet -- you'd think states would be a little more generous with tax breaks. But unfortunately, in some states, that's just not the case. If you collected unemployment benefits last year, you might still owe some states taxes on that income. Prepare for that possibility so you -- and your bank account -- won't be caught off guard.

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