State Taxation of Unemployment Benefits

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 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. 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.

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[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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