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 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. ation 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 incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross 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), https://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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