New York and 10 other states are still taxing unemployment benefits. Here’s what that means for you

While Americans who were out of work last year will get a federal income tax break on their unemployment benefits, some will still be hit with state taxes on all the compensation they received last year.

The $1.9 trillion coronavirus relief bill passed by Democrats in March created an exemption for $10,200 in jobless payments from federal income tax for households earning up to $150,000. Most states are either following the federal government’s lead, or don’t levy income taxes on unemployment compensation anyway.

But 11 states are opting to continue subjecting all 2020 jobless payments to state income taxes, according to H&R Block. They include: Colorado, Georgia, Hawaii, Idaho, Kentucky, Minnesota, Mississippi, North Carolina, New York, Rhode Island and South Carolina.

And in Massachusetts, legislators just passed a law to exempt low-income jobless residents from paying state taxes on their 2020 benefits, but those whose household earnings are above 200% of the federal poverty line will have to pay taxes on some or all of their unemployment compensation.

A wait for refunds from states that aren’t taxing benefits

People who filed their returns early this year in states that are following the federal exemption may need to wait for refunds.

President Joe Biden did not sign the relief package into law until March 11, about a month after the filing season began, so people who filed their returns early may have paid taxes on unemployment benefits that are now tax-free.

The Internal Revenue Service last month announced that it will automatically revise taxpayers’ returns and send them any refund owed, stressing that filers should not send in amended returns.

The agency will do the recalculations in two phases, starting with those eligible for the up to $10,200 exclusion. It will then adjust returns for married taxpayers filing joint returns who are eligible for the up to $20,400 exclusion and for others with more complex returns.

The IRS will then send any refund directly to taxpayers, likely starting in May and continuing into the summer.

Many states, however, have not yet said whether they will also automatically adjust residents’ state forms or whether filers will have to send in amended returns. State agencies are waiting for more information from the IRS, said Julie Sforza-Smith, regulatory affairs program manager at The Tax Institute at H&R Block.

Taxpayers who already filed should keep checking in with their state tax agencies to find out what they need to do.

“Have a bit of patience right now. Let the IRS do what they need to do on their side and let the states come out and direct taxpayers what they need to do on the state side,” she said. “If they file any amended returns prematurely, it could cause much further delays for them for getting any refund they might be due.”