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1 1 (March 8, 2021)

handle is hein.crs/govecno0001 and id is 1 raw text is: March 8, 2021 Federal Taxation of Unemployment Insurance Benefits Unemployment Insurance Benefits Are Taxa ble Income Unemployment insurance (UT) benefits have been fully subject to the federal income taxation since the passage of the Tax Reform Act of 1986 (P.L. 99-514, 26 U.S.C. §85 and 26 C.F.R §1.85-1). For the purposes of federal income taxation, the definition of Ulbenefits includes regular state Unemployment Compensation (UC) benefits, Extended Benefits (EB), Trade Adjustment Assistance (TAA) benefits, Dis aster Unemployment Assistance (DUA), as well as railroad unemploymentbenefits. For 2009, Congres s provided an exclusion for up to $2,400 in UI benefits. An exclusion ofup to $10,200, for taxpayers with modified adjusted gross income (AGI) of less than $150,000, is being considered as part of the American Rescue Plan Act of2021 (H.R. 1319, as amended). Coronavirus Disease 2019 (COVID-9) Temporary U I Programs The Coronavirus Aid, Relief, and Economic Security Act (CARES Act; P.L. 116-136, as amended) provided four additionaltemporary Ulbenefits, each of which is also subject to federalincome taxation. These are Pandemic Emergency Unemployment Compensation (PEUC), Pandemic Unemployment Assistance (PUA), Federal Pandemic Unemployment Compensation (FPUC), and Mixed-Earner Unemployment Compensation(MEUC). Additionally, Lost Wages Assistance (LWA) payments are subject to federalincome taxation. (On August 8, 2020, President Trump is sued a presidential memorandum creating LW A, a grant programthat supplemented the weekly benefits of certain eligible UI claimants through September 5, 2020.) State UC Agencies Must Inform Beneficiaries That Payments Are Taxable The tax code treats UTbenefits like other ordinary income, such as wages. States are required to informbeneficiaries that state UCpayments are included in the individual's gros s income for federal income taxpurposes and that the individual will receive Internal Revenue Service (IRS) Form 1099-G to file with their income tax return. Income Tax Withholding from UI Payments Individuals may have the option to elect to have states withhold federal (and in some cases, state) income taxfrom some types ofUIbenefits. Alternatively, individuals may opt to pay estimated federaltaxes on Ulbenefits using IRS Form 1040-ES or pay such taxes when filing a federal income tax return. According to the U.S. Department ofLabor (DOL), Employment and Training Administration (ETA) 2112 - UI Financial Trans action Summary Report data, states reported that approximately 4.5% of all UI benefits ($1.2 billion out of $27.4 billion) were withheld for the payment of federal taxes in 2019. (During 2019, these UT benefits predominately would have been UC payments.) In contrast, the percentage withheld decreased to approximately 3.7% of all UI benefits ($19.9 billion out of $532.4 billion) from April 2020 through December2020 (when CARES Act benefits were available). These data imply that CARES Act UI claimants may be less likely to have taxes withheld than claimants ofpermanent-law UTbenefits. Federal Tax Withholding: Regular UC and EB Since 1997, federaltaxlaw (26 U.S.C. §3304(a)(18)) has required state UC agencies to offer regular UC and EB beneficiaries theopportunity to electfederal income tax withholding at the time the claimant first files for UC benefits. Claimants who elect to have federal income tax withheld fromtheirregular UC benefits mustfile IRS Form W -4V, Voluntary Withholding Request unless the s tate agency has its own formforreques ting federal income tax withholding; if so, the claimant should use that state form. The current withholding rate for federalincome taxis 10% of the gross UTpayment. Federal Tax Withholding: PEUC States also must offer PEUCrecipients the opportunity to elect federal income tax withholding. DOLbases this requirement on Section 2107(a)(4)(B) of the CARES Act, which requires that state and federalUClaws apply to PEUC claims and payments to theextent practicable. (This information is based on DOUJETA email communication with authors, March2, 2021.) Federal Tax Withholding: PUA The CARES Act does notrequire that states offer PUA claimants the opportunity to elect to withhold taxes. However, as in the caseof all UC payments, DOLrequires state UC agencies to informindividuals that the CARES Act UTbenefits are subject to federalincome taxation. State agencies are encouraged by DOLto provide a withholding option for PUA beneficiaries. States agencies must informPUA recipients that PUA benefits are includedin the individual's gross income for federal income tax purposes and that the individual will receive IRS Form 1099-G to file with their income tax return. This information may be distributed to the individualby several different methods, including on the Notice of Monetary Determination, in the Benefit Rights Information packet, or where the statedeems appropriate for notifying individuals. ttps:/'crsreports.congress.gc

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