May 13, 2013 State Taxation of Unemployment Benefits Joseph Bishop-Henchman Chris Saddock Joseph Bishop-Henchman, Chris Saddock Print this page Subscribe Support our work 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), 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. Topics Center for State Tax Policy Business Taxes Data Individual and Consumption Taxes Unemployment Insurance (UI) Taxes
