Taxation of Unemployment Benefits

Abstract

Unemployment compensation (UC) benefits have been fully subject to the federal income tax since the passage of the Tax Reform Act of 1986 (P.L. 99-514). Under tax law, unemployment compensation is a broad category that includes regular state UC benefits, extended benefits (EB), trade adjustment assistance benefits, disaster unemployment assistance, and railroad unemployment benefits. The temporary Emergency Unemployment Compensation (EUC08) benefit is also included within this category. Individuals who receive UC benefits during a year may elect to have the federal (and in some cases state) income tax withheld from their benefits. The American Recovery and Reinvestment Act of 2009 (P.L. 111-5 §1007) included a temporary exclusion on the first $2,400 of UC benefits for the purposes of the federal income tax. This exclusion existed only in 2009. The Joint Committee on Taxation estimated this would reduce federal receipts by approximately $4.7 billion. There is no current exclusion on UC benefits for the purposes of federal income tax. This report provides an overview of the taxation of UC benefits and legislation related to taxing UC benefits. This report will be updated as legislative activity warrants.