The American Rescue Plan waives federal income taxes on up to $10,200 in 2020 unemployment insurance benefits for individuals who earned less than $150,000. Workers can exclude the aid when calculating their modified adjusted gross income — meaning that an individual who earned $140,000 last year but collected $10,200 in jobless aid is still eligible to take advantage of the tax break.
The break applies to this tax-filing season, which began Feb. 12 and ends May 17.
But 13 states will not offer that benefit to out-of-work Americans, according to data published this week by tax preparer H&R Block. The states are: Colorado, Georgia, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, North Carolina, New York, Rhode Island, South Carolina and West Virginia.
The federal government and most states count unemployment benefits, including the extra money distributed through federal aid programs, as taxable income. Unlike a typical paycheck, taxes aren't automatically deducted from jobless aid. Those collecting unemployment need to opt in to have taxes taken out.
Not all are aware of the lack of automatic tax deductions, creating a potential for refund shock for millions of out-of-work Americans even though they lost their job.
Alabama, California, Montana, New Jersey, Pennsylvania and Virginia are the only states to completely exempt jobless aid from taxes. Others adopted the Biden administration's rule, including Connecticut, Iowa, Illinois, Kansas, Louisiana, Maine, Michigan, Missouri, North Dakota, Nebraska, New Mexico, Oklahoma, Oregon and Utah.
About 40 million people collected jobless aid last year, according to The Century Foundation. The average person received $14,000 in benefits.
The IRS said this week that it will start issuing refunds in May to Americans who already filed their returns but are eligible to take advantage of a new break on unemployment benefits.
"Because the change occurred after some people filed their taxes, the IRS will take steps in the spring and summer to make the appropriate change to their return, which may result in a refund," the IRS said. "The first refunds are expected to be made in May and will continue into the summer."