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1 Joseph Henchman & Chris Saddock, State Taxation of Unemployment Benefits 1 (2013)

handle is hein.taxfoundation/ffdgixz0001 and id is 1 raw text is: FONAINFisa F act May 14, 2013 No. 368 State Taxation of Unemployment Benefits By Joseph Henchman & Chris Saddock Errata: A previous version of this report erroneously listed 2009 information instead of 2013 information. We regret the error. Over five million Americans are presently drawing unemployment insurance (UIl) benefits.1 As a joint federal-state program, UI benefits and taxes vary widely by state.2 State taxation of unemployment benefits also varies. Of the 41 states that tax wage income, 6 states completely exempt unemployment benefits from tax (California, Maryland, New Jersey, Oregon, Pennsylvania, and Virginia). Two states partially exempt a fixed dollar amount of benefits from state income tax but tax the rest, following federal practice from 1982 to 1986. The remaining states fully tax unemployment benefits. On the one hand, unemployment benefits are one type of income and should therefore be encompassed by an income tax. Benefits are subject to federal income tax, and minimizing differences between federal and state definitions of taxable income reduces compliance costs.3 On the other hand, many beneficiaries are under significant financial stress and often do not expect to owe income tax on their UI benefits. The table below illustrates income taxation of unemployment benefits in each state. U.S. Department of Labor Employment & Training Administration, Persons Claiming UIBenefits in Federal Programs, 2 See generally Joseph Henchman, Unemployment Insurance Taxes: Options for Program Design and Insolvent Trust Funds, TAX FOUNDATION BACKGROUND PAPER No. 61 (Oct. 2011), -- --------- -----------.- -l-i- - - -F- Q - y I r - ------- ly, the-- s --t2,400o unemployment-bene- -------- For tax year 2009 only, the first $2,400 of unemployment benefits was exempt from federal income tax.

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