Democrats look to head off surprise tax bills for the jobless

Democrats are pushing a tax cut that would benefit individuals who lost their jobs in 2020 and may be in for a surprise tax bill this spring.

Illinois’ Dick Durbin, the No. 2 Senate Democrat, and Representative Cindy Axne of Iowa introduced legislation that would waive taxes on the first $10,200 in unemployment benefits claimed last year. For millions of unemployed Americans who were able to receive enhanced federal jobless benefits, the bill would eliminate their obligation to pay Internal Revenue Service levies on those payments.

Unemployment benefits, unlike stimulus payments, are subject to federal income taxes. Many states don’t withhold taxes when they make the payments, so recipients will be required to pay those levies when they file their tax return this spring. That means that the millions of workers who received unemployment benefits could face large, unanticipated tax bills.

Marco Bello/Bloomberg

The proposal is separate from President Joe Biden’s $1.9 trillion economic relief package, which lawmakers are trying to pass in the coming months. However, the issue could gain traction when the tax filing season begins Feb. 12 and millions potentially realize that they have thousands of dollars in tax bills — something that could hurt families and work against any stimulus.

‘Further economic peril’

In past economic crises, Congress has approved tax relief to help unemployed individuals. In 2009, lawmakers waived taxes on up to $2,400 in jobless benefits.

The proposed law will “ensure that these workers don’t face an unexpected tax bill, which could put them into further economic peril this April,” Axne said in a statement.

The legislation is estimated to cost roughly $30 billion, but it hasn’t been officially scored by the Congressional Budget Office, according to Ian Mariani, a spokesman for Axne. About 40 million Americans could be eligible for the tax relief, he said.

Congress greatly expanded unemployment benefits in 2020: providing $600 weekly benefits through July, approving another $300-a-week supplement in December, boosting the number of weeks the payments can be claimed and expanding benefits to self-employed individuals who typically aren’t eligible for unemployment insurance. In total, Congress passed nearly $400 billion in jobless benefits last year.

As many as 18.3 million Americans were still receiving some form of unemployment benefits in early January, according to Labor Department data released last week.