![]() ![]() Indiana is one example where action may still be taken. The list of states that are not waving taxes on unemployment compensation is dynamic and some may still decide to conform to the federal exemption. Therefore, state taxes on unemployment compensation alone could eat up between two to three weeks of enhanced federal payments. To contextualize, the Federal Pandemic Insurance Compensation (FPUC) is providing an extra $300 per week in benefits. That would translate into incremental state taxes of $841 on $10,200 in unemployment compensation. Residents with $150,000 in taxable income pay a marginal state tax rate of 8.25 percent. The impact is worse in Hawaii where state tax rates go as high as 11 percent. Without an exemption, someone who received $10,200 in unemployment compensation as part of their taxable income would be forced to pay an incremental $653 in state taxes. Someone with $150,000 in taxable income would be paying a marginal state tax rate of 6.41 percent. Take New York State, where state tax rates range from 4 percent to 8.82 percent. Taxing unemployment insurance is a “policy choice hurts lower-earning households, who have more difficulty making large one-time tax payments,” Pancotti and Brian Galle argued in a Century Foundation report. With nearly two-thirds of Americans living paycheck to paycheck since the pandemic started, the sad reality is that most may not have access to the necessary funds to pay their state tax liability. While state tax rates are typically lower than federal ones, the liability could still be substantial. Over $580 billion in unemployment insurance benefits was paid out in 2020 to roughly 40 million Americans. ![]()
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