Taxed or not?

State, feds differ over exemption on unemployment compensation

By JOHN HOWELL
Posted 4/1/21

By JOHN HOWELL Gary Harlowe of Warwick had completed his tax return when he learned this week that even though the federal government exempts $10,200 in unemployment compensation from taxation, the state wouldn't be following suit. Now, Harlowe is

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Taxed or not?

State, feds differ over exemption on unemployment compensation

Posted

Gary Harlowe of Warwick had completed his tax return when he learned this week that even though the federal government exempts $10,200 in unemployment compensation from taxation, the state wouldn’t be following suit.

Now, Harlowe is looking to have his accountant amend his return in order to pay the state an added $72. He doesn’t know what his accountant will charge him, but the initial invoice was $180.

Harlowe is ready to put up with the aggravation of an amended return, but it’s the way the state did it that has him annoyed.

“It was midstream,” he says, pointing out this could have been planned from the beginning.

Earlier this week, the Rhode Island Division of Taxation issued a press release providing “guidance” on tax returns.

Normally, unemployment benefits are subject to both federal and Rhode Island personal income tax.

It reads: “Under federal legislation enacted on March 11, 2021, if a taxpayer received unemployment benefits in 2020 and the taxpayer’s federal adjusted gross income (AGI) was less than $150,000 for 2020, the first $10,200 of the taxpayer’s unemployment benefits is excluded from income for federal tax purposes for 2020.”

It continues: “In contrast to the federal law, for Rhode Island tax purposes, existing Rhode Island law remains unchanged with respect to the tax treatment of unemployment benefits. Thus, for Rhode Island personal income tax purposes, unemployment compensation continues to be included as income.”

Rhode Island will follow current Rhode Island law regarding the Rhode Island tax treatment. Rhode Island Tax Administrator Neena Savage is quoted as saying the state will follow the state law.

“While Rhode Islanders will receive a benefit at the federal level, the Division will follow the current Rhode Island law for Rhode Island personal income tax purposes which requires that unemployment compensation be taxed,” she said.

On Tuesday, Deputy House Speaker Charlene Lima (D-Dist. 14, Cranston, Providence) issued a release saying that she and Rep. David Morales will introduce legislation to extend the federal exemption on unemployment compensation to Rhode Island personal income tax returns.

“Our citizens need all the financial help the government can give in order for them to survive the economic harm caused by this pandemic that was caused through no fault of their own.  It would be unconscionable if Rhode Island did not follow the Federal Government’s tax exemption for unemployment benefits. This is especially true since we will be receiving over a billion dollars in stimulus money from the Feds. This money must be given to those individuals most harmed by this pandemic and my legislation would help in accomplishing this goal,” she said in a statement.

In an interview, Lima said it is her understanding that applying the exemption would result in a loss of about $30 million in state revenues. On average, she thought the legislation would result in a $600 savings to those who would otherwise pay unemployment taxes.

According to a spokesman for the Department of Revenue, the department was provided unemployment compensation numbers (from DLT) for 202,367 individuals and estimated a revenue loss from exempting up to a maximum of $10,200 per person of $29.3 million.  The claims were paid to both Rhode Island residents and non-residents that received Rhode Island unemployment compensation.

taxes, unemployment

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