Democrats call for relief package to waive taxes on unemployment benefits

A group of House Democrats is urging leadership to provide tax relief for recipients of unemployment benefits in the $1.9 trillion coronavirus relief package the House is expected to vote on this week.

“As we work to deliver on much-needed support for families, workers, and businesses, we should not be extending benefits with one hand and taxing them with the other,” the lawmakers wrote in a letter dated Thursday. 

Rep. Cindy Axne (D-Iowa) took the lead on the letter, which was signed by 11 other House Democrats and sent to Speaker Nancy Pelosi (D-Calif.), House Majority Leader Steny Hoyer (D-Md.), House Budget Committee Chairman John Yarmuth (D-Ky.) and House Rules Committee Chairman James McGovern (D-Mass.).

The pandemic resulted in millions of Americans receiving unemployment benefits for the first time in 2020. Relief legislation enacted last year created several federal unemployment programs.

Unemployment compensation is subject to federal income taxes, but many Americans were unaware of this when they received benefits. As a result, people may be surprised when they file their 2020 tax returns this year that they owe money to the IRS or are entitled to smaller refunds than they expected.

The relief package that the House is considering this week extends federal unemployment programs, but it doesn’t exempt any unemployment benefits from taxes. The Democratic lawmakers who wrote the letter are sponsors of a bill that would exempt the first $10,200 in unemployment insurance (UI) received last year from federal income taxes, and they want their measure to be included in a manager’s amendment to the relief package.

“Workers and families are still struggling with the economic pain caused by COVID-19, and we are pleased the American Rescue Plan extends unemployment benefits for workers and financial support for small businesses,” the lawmakers wrote. “However, impending tax bills on UI benefits take away vital dollars that individuals need to pay for essential expenses like housing, health care, and food.”

It could be challenging to add the tax relief for unemployment-benefit recipients into the relief package because the package can’t add more than $1.9 trillion to the deficit under Congress’s fiscal 2021 budget resolution.

IRS Commissioner Charles Rettig said at a congressional hearing earlier this week that people who received unemployment compensation in 2020 and weren’t aware that it is taxable should contact the IRS about payment-relief options.