What's the deadline for states to choose to offer $10,200 unemployment tax break?

As states grapple with the need to collect revenue while supporting their residents who have been hardest hit by the economic fallout, all but 12 states have now waived taxes on the first $10,200 of unemployment compensation.

The Internal Revenue Service (IRS) has told taxpayers that have already filed their taxes with unemployment benefits not to amend their tax returns, barring those taxpayers are now eligible for additional federal credits and deductions that weren’t included on the original tax return.

How long do states have to decide whether they will apply the tax break?

Just as the IRS has been taxed over the past year to process new tax provisions and send out direct stimulus payments with staffing shortages and complications due to the covid-19 pandemic, so too have the states. For two consecutive years the IRS has had to push back the deadline for filing taxes putting a strain on states to either follow suit or go back and adjust state tax filings after the fact. Some states have already synchronized their filing dates with the federal date and/or implemented the federal tax waiver on unemployment benefits collected by over 23 million Americans.

At the beginning of the month Massachusetts changed how it will treat jobless aid for tax purposes. Although the state will not follow the federal rule, the state will offer an unemployment compensation exclusion under state law for qualifying taxpayers. Currently, West Viriginia’s legislature is mulling over conformity legislation to follow the federal rule. If it becomes law, taxpayers may have to file an amended tax return to receive the tax break.

Generally speaking, its frowned upon to make a new tax retroactive if it penalizes a group just to fill the coffers, but it can and has been done. However, if a new tax could be beneficial to taxpayers at the expense of the state, it’s possible that the states that haven’t yet adopted the waiver could do so in the future, even after tax returns have been processed. That said the onus could be on the taxpayer to take advantage of the tax break.

Who is eligible for the $10,200 tax break?

The American Rescue Plan passed in March gave an extra bit of help to those who were unemployed in 2020 and collected jobless aid. The law waives federal tax on up to $10,200 of unemployment compensation per person received in 2020.

The waiver is available to individuals and couples who have an adjusted gross income (AGI) of less than $150,000. The IRS updated its guidance and now allows workers to exclude unemployment compensation from AGI calculations.

Which states are taxing unemployment benefits?

There are 12 states that tax unemployment payments that have yet not followed the federal lead to extend a waiver to the first $10,200 in unemployment benefits claimed in 2020 according to H&R Block.

They are: Colorado, Georgia, Hawaii, Idaho, Kentucky, Minnesota, Mississippi, North Carolina, New York, Rhode Island, South Carolina and West Virginia (which is currently legislating conformity).

Will handle waiver administratively:

Another group of states don’t conform to the federal rule but will let taxpayers file as if the state does, effectively giving filers the waiver.

They are: Arizona, Ohio and Vermont

Partial unemployment benefits exclusion:

Three states offer partial unemployment compensation exclusions under state law.

They are: Indiana, Massachusetts, and Wisconsin

States that have adopted the federal waiver:

There are 14 states and DC that have adopted the new federal waiver. In those states, up to $10,200 of benefits are excluded from tax, but amounts in excess are taxable. The income-eligibility limit of $150,000 for individuals and married couples also applies.

They are: Connecticut, Iowa, Illinois, Kansas, Louisiana, Maine, Michigan, Missouri, North Dakota, Nebraska, New Mexico, Oklahoma, Oregon and Utah, as well as Washington, DC.

States that haven’t adopted the American Rescue Plan’s tax break may still opt to do so. To check whether your state is ready for you to file your state income tax now check here.

Which states don’t tax unemployment benefits?

The remaining states either don’t tax income or don’t tax unemployment benefits.

States that don’t tax unemployment benefits:

They are: Alabama, Arkansas, California, Delaware, Maryland, Montana, New Jersey, Pennsylvania, Virginia.

Which states don’t tax income?

There are nine states that don't have income tax, but two of them still require taxpayers to file a tax return under certain circumstances. In New Hampshire and Tennessee, if an individual taxpayer receives more than $2,400 or $1,250, respectively, in interest and dividend income, they have to file. In the other seven states taxpayers technically only have to file a federal income tax return.

They are: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, but you might not be off the hook completely.

In the remaining “taxable” 42 states and the District of Columbia, you will need to file a tax return if you reside there or are a resident. Some states have already changed their filing deadlines to synch with the extended federal deadline of 17 May, Oklahoma, Louisiana and Texas have until 15 June. The IRS provides a list of state tax agencies to check what the filing deadline is where you are a resident.

You must file a return where you are a resident and where you reside, in addition to your federal tax return

Americans move around to go where the work is, but that doesn't mean that they stop residing in their home state. So, for example, if you work in Nevada but you are a resident of California, you still need to report the income you earned in Nevada to the tax agency in California as well as your federal tax filing. Likewise, if you are a resident of Florida but work in Georgia, you will need to file a non-resident Georgia return even though Florida is a tax-free state.