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Britt Erica Tunick is an award winning financial journalist who has spent the past 17 years writing about virtually every aspect of finance.

Unemployment Insurance Is Not Tax Free

Unemployment Insurance Is Not Tax Free

By Britt Erica Tunick

Unemployment insurance is a great safety net for people who are out of work due to no fault of their own. What it is not, however, is tax free.

That’s right. Even though unemployment insurance exists as a temporary replacement of lost income for individuals who have been laid off and who have yet to find new employment, Uncle Sam still wants his cut. The federal government taxes unemployment benefits the same way that it would tax wages. Whether or not you will need to pay state taxes on your unemployment insurance benefits, however, depends on where you live.

Following is a list of the states that do not tax unemployment insurance benefits, or partially exempt them from state taxes:

  • Alabama
  • California
  • Florida
  • Montana
  • Nevada
  • New Hampshire
  • New Jersey
  • Pennsylvania
  • South Dakota
  • Tennessee
  • Texas
  • Virginia
  • Washington
  • Wyoming

If you live anywhere other than in one of the listed states and are receiving unemployment benefits, expect to pay state income taxes on the checks you receive, in addition to federal income taxes. The amount you will need to pay, however, ranges from state to state. In some instances, however, even if the state where you reside imposes taxes on your unemployment benefit income, you may still receive a partial deduction on your federal income tax return.

Although there are a few exceptions, the majority of states allow eligible individuals to receive up to 26 weeks of unemployment benefits. The amount you are eligible for is based on what you were earning at your last job and how long you were in that position, and typically replaces roughly half of the income that you last earned –up to a certain threshold. Of course, what state you live in is again a major factor in how much you can expect in benefits, as the maximum amount varies significantly from state to state. In 2020, an individual residing in Rhode Island, who has dependents, can expect to be eligible for up to a maximum of $867 per week, whereas the maximum amount in Washington is $790 per week. On the flip side, Louisiana residents have the lowest unemployment benefits, with their maximum weekly amount capped at $247. In all cases, what you will actually receive will depend on your previous income, as well as other factors such as how long you were earning that amount and how long it has been since you last received unemployment benefits.

The Coronavirus Aid, Relief and Economic Security (CARES) Act that was recently enacted provides an additional 13 weeks of benefits, up to 39 weeks from the previous maximum of 26 weeks, and increases the amount that individuals are eligible for by an additional $600 per week. This increase is temporary, however, and is only applicable for individuals receiving unemployment benefits between April 5, 2020 and July 31, 2020.