Democrats Aim to Reduce Surprise Tax Bills for Jobless

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Just in time for tax season, Democratic lawmakers introduced a bill Tuesday to make income taxes a little easier on those who collected unemployment benefits at some point during the pandemic, saving many from what could be a nasty surprise when filing their taxes. 

If passed, the law would waive federal income taxes on the first $10,200 in unemployment benefits received in 2020. This would lower federal income taxes for people who received benefits through regular state unemployment programs or any of the unemployment programs established by the federal government as pandemic relief. 

Currently, unemployment benefits count as taxable income as far as the IRS, and tax collectors in many states, are concerned, a fact that is little known among taxpayers. There were more than 68 million new unemployment claims after March 21 in 2020, according to Department of Labor statistics, and tax experts expect that millions will see unexpectedly reduced tax refunds, or end up owing money to the IRS.

“Families across the country are struggling to keep a roof over their head, food on the table, and to pay for health care and other necessities,” Sen. Dick Durbin said in a statement. Durbin introduced the bill along with Rep. Cindy Axne. “The bill ... would provide tax relief to unemployed Americans so they can spend their benefits supporting their families and their communities.”

The end-of-year tax bill could be especially heavy for those who collected the $600 weekly unemployment supplement provided by the CARES Act in the spring. Between April and July, 76% of unemployment recipients were eligible to receive more money while on unemployment than they made at their jobs thanks to this benefit, according to an analysis by economists at the Becker Friedman Institute. The proposed bill would waive federal income taxes on 17 weeks’ worth of the additional $600 weekly supplement for those who collected it during that time, though people would still have to pay federal income taxes on the rest of their unemployment benefits.