State Taxation of Unemployment Benefits

May 13, 2013

Errata: A previous version of this report erroneously listed 2009 information instead of 2013 information, and listed incorrect information for Maryland and Montana. We regret the error.

Over five million Americans are presently drawing unemployment insurance (UI) benefits.[1] As a joint federal-state program, UI benefits and taxes vary widely by state.[2]

State taxation of unemployment benefits also varies. Of the 41 states that tax wage income, 5 states completely exempt unemployment benefits from tax (California, New Jersey, Oregon, Pennsylvania, and Virginia). Two states partially exempt a fixed dollar amount of benefits from state income tax but tax the rest, following federal practice from 1982 to 1986. The remaining states fully tax unemployment benefits.

On the one hand, unemployment benefits are one type of income and should therefore be encompassed by an income tax. Benefits are subject to federal income tax, and minimizing differences between federal and state definitions of taxable income reduces compliance costs.[3] On the other hand, many beneficiaries are under significant financial stress and often do not expect to owe income tax on their UI benefits.

The table below illustrates income taxation of unemployment benefits in each state.

Table: State Taxation of Unemployment Benefits

State

Income Taxation of Unemployment Benefits

Alabama

Fully taxed

Alaska

No state income tax

Arizona

Fully taxed

Arkansas

Fully taxed

California

Fully exempt

Colorado

Fully taxed

Connecticut

Fully taxed

Delaware

Fully taxed

Florida

No state income tax

Georgia

Fully taxed

Hawaii

Fully taxed

Idaho

Fully taxed

Illinois

Fully taxed

Indiana

Exempts 50% of the amount above $12,000 (single) or $18,000 (married)

Iowa

Fully taxed

Kansas

Fully taxed

Kentucky

Fully taxed

Louisiana

Fully taxed

Maine

Fully taxed

Maryland

Fully taxed

Massachusetts

Fully taxed

Michigan

Fully taxed

Minnesota

Fully taxed

Mississippi

Fully taxed

Missouri

Fully taxed

Montana

Fully exempt

Nebraska

Fully taxed

New Hampshire

No state wage tax

Nevada

No state income tax

New Jersey

Fully exempt

New Mexico

Fully taxed

New York

Fully taxed

North Carolina

Fully taxed

North Dakota

Fully taxed

Ohio

Fully taxed

Oklahoma

Fully taxed

Oregon

Fully exempt

Pennsylvania

Fully exempt

Rhode Island

Fully taxed

South Carolina

Fully taxed

South Dakota

No state income tax

Tennessee

No state wage tax

Texas

No state income tax

Utah

Fully taxed

Vermont

Fully taxed

Virginia

Fully exempt

Washington

No state income tax

West Virginia

Fully taxed

Wisconsin

Exempts 50% of the amount above $12,000 (single) or $18,000 (married)

Wyoming

No state income tax

District of Columbia

Fully taxed

Source: Tax Foundation review of state statutes and tax instructions.


[1] U.S. Department of Labor Employment & Training Administration, Persons Claiming UI Benefits in Federal Programs, http://workforcesecurity.doleta.gov/unemploy/docs/persons.xls.

[2] See generally Joseph Henchman, Unemployment Insurance Taxes: Options for Program Design and Insolvent Trust Funds, Tax Foundation Background Paper No. 61 (Oct. 2011), http://taxfoundation.org/article/unemployment-insurance-taxes-options-program-design-and-insolvent-trust-funds.

[3] For tax year 2009 only, the first $2,400 of unemployment benefits was exempt from federal income tax.

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