Democrats close in on deal to provide tax relief for unemployment recipients

Senate Democrats are close to a deal that would amend their $1.9 trillion coronavirus relief package by exempting a portion of unemployment benefits from federal income taxes.

The agreement would waive taxes on the first $10,200 in unemployment compensation that taxpayers received in 2020, according to a Democratic aide. That amount matches legislation that Sen. Dick Durbin (D-Ill.) and Rep. Cindy Axne (D-Iowa) introduced earlier this year.

The exemption would apply for the 2020 taxes that people are filing this year. Taxpayers who received unemployment benefits and have already filed would be able to submit amended returns.

The exemption is meant to address the fact that many recipients of jobless benefits have been surprised by their 2020 tax bills, either through smaller refunds or owing money.

Millions of Americans received unemployment benefits last year amid the coronavirus-related economic downturn. Typically, the benefits are considered taxable income at the federal level, as well as in many states.

But many recipients may not have had those taxes withheld from their benefits when they received periodic payments last year.

IRS Commissioner Charles Rettig said at a hearing last month that people who received unemployment benefits in 2020 and have unexpected tax bills should contact the agency about payment relief options.

The compromise amendment achieves that while helping to address the surprise tax bills that many are facing by eliminating the first $10,200 of unemployment insurance benefits from taxation for 2020. Combined, this amendment would provide more relief to the unemployed than the current legislation.

The forthcoming agreement on taxable unemployment benefits is part of a broader deal that would reduce the amount of the relief package’s weekly boost to unemployment benefits from $400 to $300. The enhanced benefits would be extended to Oct. 4, instead of the late August deadline in the earlier version of the bill.

White House press secretary Jen Psaki on Friday praised the proposed deal affecting unemployment insurance (UI) benefits and taxes.

“The President believes it is critical to extend expanded unemployment benefits through the end of September to help Americans who are struggling, as the President proposed in the American Rescue Plan,” she tweeted.

“The compromise amendment achieves that while helping to address the surprise tax bills that many are facing by eliminating the first $10,200 of UI benefits from taxation for 2020. Combined, this amendment would provide more relief to the unemployed than the current legislation.”

Durbin responded by tweeting: “.@RepCindyAxne and I have been leading the fight for tax relief for unemployed Americans for some time now. We should be doing everything we can help struggling families grapple with this pandemic and I am glad that @POTUS agrees.”

Alexander Bolton contributed. Updated at 12:38 p.m.