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Bill in Minnesota House would forgive state portion of income taxes on extra unemployment payments

As tax bills come due, some Minnesotans have been surprised to learn that extra unemployment payments through the CARES Act and later executive action didn’t have taxes withheld.

State Rep. Zack Stephenson
MinnPost photo by Peter Callaghan
State Rep. Zack Stephenson introduced the bill to allow Minnesotans to subtract the supplemental unemployment payments from their income in taxes.
Some Minnesotans who received unemployment benefits during the pandemic are facing hefty tax bills this spring.

While the state withheld taxes on regular unemployment benefits (which are taxed like regular income),it did not withhold taxes from the extra $600 weekly payments from the CARES Act and the $300 weekly supplemental unemployment payments created by the action of President Donald Trump whether withholdings were requested or not. As MinnPost reported Wednesday, the Minnesota Department of Employment and Economic Development, which administers Minnesota’s unemployment system, says it did not have the infrastructure in place to handle withholdings on the extra payments and said it chose to pay workers quickly rather than take the time to develop such a system.

DEED notified unemployment recipients that the payments wouldn’t have taxes withheld, but some people were still caught unaware when they did their taxes, or assumed the payments would not be taxed as income since stimulus payments weren’t.

A bill introduced Thursday in the Minnesota House of Representatives could provide relief to Minnesotans facing surprise tax bills by forgiving state taxes on the pandemic-related extra unemployment payments.

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Rep. Zack Stephenson (DFL-Coon Rapids) introduced the bill to allow Minnesotans to subtract the supplemental unemployment payments from their income in taxes after hearing from people and after MinnPost wrote about it.

“There’s been a lot of focus and discussion by my Republican colleagues on these PPP [paycheck protection program] loan issues, and how that is creating unexpected tax bills, but candidly I’m just as if not more concerned about working families seeing huge tax bills that they weren’t expecting,” he said.

(A bill was recently introduced to forgive state taxes on federal PPP loans, which some businesses were surprised to find that, though forgivable, were taxed as corporate income by the state.)

Stephenson acknowledged his bill would be unlikely to pass before May, after most Minnesotans have done their taxes. That means taxpayers may have to file an amendment to get their money back.

Other states have forgiven taxes on some or all unemployment benefits, according to Forbes.

On Friday, the state announced a forecast of a $1.6 billion budget surplus. Stephenson said while he was watching a presentation on the budget, he was struck that the effects of this recession, compared to the Great Recession, have disproportionately fallen on people working in lower-wage sectors, and that eliminating the tax on the supplemental unemployment payments would help these people directly. Stephenson said he didn’t yet know how much the proposal would cost.

“It’s really important to think about how we respond from a policy perspective to what’s going on, and I think it’ really drives home for me that the focus should be on helping those working people who got hit hard,” he said. “As we think about the budget this year, we really need to be prioritizing, with our limited resources, helping the people that were most hurt during the economic crisis caused by COVID.”