Congress moves to exempt unemployment benefits from federal income tax
H.R. 2655 — To amend the Internal Revenue Code of 1986 to sunset the Federal income tax on unemployment compensation. · Filed by Shri Thanedar (D-MI) · 4 cosponsors · Introduced Apr 3, 2025 · Referred to committee
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What it does
This bill eliminates federal income tax on unemployment compensation starting in 2025. Currently, unemployment benefits are counted as taxable income; this bill removes that requirement, allowing recipients to keep their full unemployment payments without federal tax liability.
Why we flagged it
The bill's sole operative mechanism is a tax exemption for unemployment compensation recipients. It is a straightforward income-tax carve-out benefiting a specific class of taxpayers during periods of joblessness.
What the text implies
- Eliminates federal revenue from unemployment-benefit taxation, reducing Treasury receipts by an estimated $2–4 billion annually (depending on unemployment rate and benefit levels), with no stated offset or appropriation.
- May increase state-level tax liability in states that conform their tax code to federal IRC §85; states would need separate legislation to decouple and avoid taxing unemployment benefits.
The full analysis lists 3 implications of this text.
Who stands to gain
Individuals receiving unemployment compensation