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1 1 (March 18, 2021)

handle is hein.crs/govecrx0001 and id is 1 raw text is: Updated March 18, 2021 Federal Taxation of Unemployment Insurance Benefits Unemployment Insurance Benefits Are Taxable Income Unemployment insurance (UT) benefits have been fully subject to federalincome 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, and Dis aster Unemployment Assistance (DUA), as well as railroad unemployment benefits, andhas included all temporary Ulbenefits since Ulbenefits became taxable. The American Rescue Plan Act of2021 (P.L. 117-2) allows taxpayers with modified adjusted gross income (AGI) of less than $150,000 to exclude up to $10,200 in UT benefits from2020 taxable income. This applies to all UTbenefits including the temporary UTbenefits discussed below. For 2009, Congress provided an exclusion fromtaxable income for up to $2,400 in UT benefits. Coronavirus Disease 2019 (COVID-1 9) Temporary UI Programs The Coronavirus Aid, Relief, and Economic Security Act (CARES Act; P.L. 116-136, as amended)provided four additionaltemporary UT benefits, 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 U claimants through September 5, 2020.) State UC Agencies Must Inform Beneficiaries That Payments Are Taxable The tax code treats UT benefits like other ordinary income, such as wages. States are required to informbeneficiaries that state UCpayments are included in the individual's gross income for federalincome 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 ofUlbenefits. Alternatively, individuals may opt to pay estimated federaltaxes on Ulbenefits using IRS Form 1040-ES or pay such taxes when filing a federal income taxreturn. According to the U.S. Department of Labor (DOL), Employment and Training Administration (ETA) 2112-UI Financial Trans action Summary Report data, states reported that approximately 4.5% of all UT benefits ($1.2 billion out of $27.4 billion) were withheld for the payment of federal taxes in 2019. (During 2019, these UTbenefits predominately would have been UC payments.) In contrast, the percentage withheld decreased to approximately 3.7% of all UT benefits ($19.9 billion out of $532.4 billion) from April 2020 through December 2020 (when CARES Act benefits were available). These data imply that CARES Act UT 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 the opportunity 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 must file IRS Form W-4V, Voluntary Withholding Request unless the state agency has its own formforrequesting federal income tax withholding; if so, the claimant should use that state form. The current withholding rate for federalincome taxis 10% of the gross UIpayment. Federal Tax Withholding: PEUC States also must offer PEUC recipients theopportunity to elect federal income tax withholding. DOL applies 26 U.S.C. Section 3304(a)(18) to PEUC based upon Section 2107(a)(4)(B) of the CARES Act, which requires that state and federal UC laws apply to PEUC claims and payments to the extent practicable. 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 thatthe CARES Act UTbenefits are subject to federalincome taxation. State agencies are encouraged by DOLto provide a withholding option for PUA beneficiaries. State 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 ttps://crs reports.congress.gc

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