International Forecaster Weekly


Here’s the thing, though: the federally funded weekly payments ($600 last year, $300 this) — like state UI benefits — are taxable by the IRS at a minimum. 

Most states tax UI benefits as well. Of the 40 states that tax income, only five — California, New Jersey, Oregon, Pennsylvania and Virginia — fully exempt UI benefits. 

Guest Writer | February 19, 2021

By Dave Allen for Discount Gold & Silver

WARNING: THE TAX MAN COMETH...even if you’re collecting unemployment benefits.

If Covid has cost you or a loved one a job, you’re one of 10.7 million people, or 6.7% of the American workforce, who were unemployed in December. 

And if you received unemployment benefits (there were an estimated 74 million initial jobless claims filed from March through December 2020) — you owe federal and probably state income taxes on what you got. 

Many states cap their highest unemployment insurance (UI) paymouts at half the state’s average weekly wage, while others have lower caps. 

Last February, average weekly UI benefits were $387 nationwide but ranged from a low of $215 in Mississippi to $550 in Massachusetts, according to the nonpartisan Center on Budget and Policy Priorities. 

Through December, about 4 million people have been unemployed for more than 26 weeks, which is when state unemployment insurance typically runs out. 

Under last March’s CARES Act, people who were laid off because of the pandemic were eligible to get an additional $600 per week until July 31, 2020. 

This federally funded $600 weekly benefit extended to people who aren’t traditionally covered by state unemployment insurance. 

Under the popular (and extensively abused) Pandemic Unemployment Assistance (PUA) program, the self-employed, independent contractors and so-called gig workers were covered by unemployment for up to 39 weeks if they lost their jobs as a direct result of the pandemic. 

Another program — the Pandemic Emergency Unemployment Compensation (PEUC) — program, provided an extra 13 weeks of federally funded unemployment insurance payments after state benefits ran out.

In December, Congress passed another relief package, worth $900 billion, that includes an extra $300 a week in PUA unemployment benefits and extended the PEUC program through March 14th. 


Here’s the thing, though: the federally funded weekly payments ($600 last year, $300 this) — like state UI benefits — are taxable by the IRS at a minimum. 

Most states tax UI benefits as well. Of the 40 states that tax income, only five — California, New Jersey, Oregon, Pennsylvania and Virginia — fully exempt UI benefits. 

Indiana and Wisconsin allow partial exemptions. In the remaining 33 states, UI benefits are fully taxable in the state providing the benefit.

The Tax Cuts and Jobs Act, passed in late 2017, in addition to lowering marginal tax brackets, increased the standard deduction.

As a result, many low- to middle-income taxpayers receiving UI benefits may end up owing little or no federal taxes.

Most others, however, are on the hook, and many of them didn’t know that when they signed up for UI payments.

Writer Emily Peck tells us about Julie Evans, who thought she’d get a refund from the IRS this year, so she got to work on her taxes first thing in January. 

Peck reports that Evans was out of work for all of 2020. To save money, she moved in with her adult children in Kent, Washington, and has been scraping by on unemployment benefits. 

“The idea of $400 or so [refund] was enticing,” she told Peck. Instead, Evans got a shock…a $1,600 tax bill! “I don’t know where I’m going to come up with the money,” the 59-year-old said.

Evans isn’t alone by a long shot. The U.S. is about to face what has to be one of the more cruel and ironic policy failures of the pandemic. 

Millions of Americans, already struggling financially, could be hit with a huge tax bill because they received unemployment benefits last year.

Unbelievably, because of the $600 weekly federal pandemic benefits, recipients’ tax bills for 2020 could reach into the thousands.

That’s according to a report released last week by The Century Foundation and based on anecdotal evidence provided by unemployed workers.

Georgetown Law School professor and the Foundation report’s co-author Brian Galle said households could see tax bills between $1,000 and $2,000. 

Some bills could reach as high as $3,000, and others who may not owe money won’t get the level of refunds they were expecting. And most of these people still don’t have jobs. 

Galle added, “Asking people who are out of work to dig into their pockets and come up with another $3,000 when they’re already having trouble paying rent…is just a bad combination of events.”

The tax bills are coming as a big surprise to most people. As Peck asks, “Who would think that the government would tax the money it provided to help people avoid going broke” in the first place? 


Other federal benefits — like those provided by the Supplemental Nutrition Assistance Program (formerly Food Stamps) — aren’t taxed like this.

In fact, unemployment benefits weren’t taxed at all (by the IRS anyway) until 1978.

That’s when members of Congress were warned by economist Marty Feldstein and others that if jobless payments weren’t taxed like income, workers would have an “incentive” to stay unemployed. 

Sound familiar? Feldstein also believed that Social Security discouraged people from saving for retirement and that tax cuts for the rich trickled down to the working classes — both proven to be false.

Peck argues that the reasoning behind taxing unemployment

benefits theory is wrong. First, most people aren’t aware that the payments are even taxed (states have to do a better job of informing recipients of that). 

Plus, she adds, plenty of research suggests that unemployment benefits don’t keep people from working. But they do keep them in many cases from going under.

And during a pandemic, much of the point of expanded unemployment benefits was to incentivize people to work at home to prevent the virus from spreading.

Usually, taxing unemployment benefits aren’t a big issue, because people are unemployed for a few weeks and don’t get enough UI to owe anything back in taxes. 

But in a recession — especially a deep one like we’ve been in — when people are out of work for longer periods of time, it’s an issue. 

In 2009, facing this very problem, Congress exempted about $2,000 of benefits from taxes. They should do it again. 

If not exempting all UI benefits from federal taxes during a recession or pandemic, why not exempt a portion of benefits, based on an individual’s adjusted gross income — similar to how social security benefits are taxed.

The scale of the current jobless crisis is far worse than even during the Great Recession. 

At the peak last April, the headline unemployment rate hit a record 14.7% (some like say it was over double that). 

Yes, it’s fallen since then, but over 20 million Americans remain jobless today and, all the while, income inequality continues to widen.

And now many households are in danger of losing their homes and not being able to put food on the table for their families.

Surely, Uncle Sam can afford a little more spare change…can’t he?