Democrats call for relief package to waive taxes on unemployment benefits

Democrats call for relief package to waive taxes on unemployment benefits
© Greg Nash

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 AxneCindy AxneAxne endorses Finkenauer Senate bid in Iowa Grassley pressured to run as Democrats set sights on Iowa Republicans focus tax hike opposition on capital gains change MORE (D-Iowa) took the lead on the letter, which was signed by 11 other House Democrats and sent to Speaker Nancy PelosiNancy PelosiLiz Cheney says her father is 'deeply troubled' about the state of the Republican Party 19 House Democrats call on Capitol physician to mandate vaccines Ohio special election: A good day for Democrats MORE (D-Calif.), House Majority Leader Steny HoyerSteny Hamilton HoyerYellen tries to tamp down Democrats fury over evictions ban House bundling is bad for deliberation CBC presses Biden to extend eviction moratorium MORE (D-Md.), House Budget Committee Chairman John YarmuthJohn Allen YarmuthA permanent Child Tax Credit expansion will yield dividends to taxpayers Democrats look to flip script on GOP 'defund the police' attacks Democrats hit crunch time in Biden spending fight MORE (D-Ky.) and House Rules Committee Chairman James McGovernJames (Jim) Patrick McGovernBipartisan congressional commission urges IOC to postpone, relocate Beijing Games Journalism watchdog files criminal complaint against Saudi crown prince Democrats call for relief package to waive taxes on unemployment benefits MORE (D-Mass.).

ADVERTISEMENT

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.