Most people on unemployment last year didn’t have state income taxes taken out, potentially leaving them with a bill when those taxes come due in May.
North Carolina is one of several states that hasn’t adopted a federal tax policy that makes the first $10,200 in unemployment benefits exempt from income tax, according to a count from H&R Block.
For people who were unemployed last year, that means they won’t have to pay taxes to the feds on the first $10,200 of unemployment benefits. And if they already paid those taxes through withholding, the IRS will send a refund. But when it comes to state income taxes, they’ll be taxed like normal.
The North Carolina General Assembly could change this, but there’s no apparent move to do so.
“I don’t think we’re doing that,” House Finance Chairwoman Julia Howard said Friday. “It’s always been something that is taxed.”
The General Assembly is moving, though, on a tax change that would save businesses around the state $367 million.
The state’s Division of Employment Security said it sent out about 950,000 1099-G notices to people who got unemployment benefits in 2020 and that about 530,000 of them – nearly 60 percent – chose not to have state taxes withheld as they got weekly payments.
Neither DES nor the state Department of Revenue was able to estimate Friday how much these 530,000 people would owe next month, but it’s clear the state could ease their tax burden by conforming to federal policy.
“I don’t understand why some states are doing it and some states aren’t,” said Randy Gilliland, a Siler City man who was unemployed in 2020 and reached out to WRAL News this week about the issue. “I don’t see the logic in it.”
“Thank God in Heaven I did have my taxes taken out,” Gilliland said. “These other people who didn’t, I feel sorry for them.”
Both the state and federal governments pushed tax day back about a month this year, from April 15 to May 17, and the state Department of Revenue has said it won’t charge penalties for people who owe taxes and file by the new deadline.
However, it takes a change in state law to waive the interest that will accrue over that month. That change is coming, according to Howard, R-Davie, who said legislation on the matter will likely move next week.
Gov. Roy Cooper supports that interest waiver, according to his press office. He has not asked the legislature to forgive state income taxes for the unemployed, but spokesman Ford Porter said he’s willing to discuss it.
“The governor has an open mind on that and expects to discuss it with legislators,” Porter said this week.
The legislature is moving to ease tax burdens for businesses that took money from the Paycheck Protection Program, a forgivable loan meant to keep businesses from laying people off during the pandemic.
Legislation in the House (House Bill 334) and the Senate (Senate Bill 112) would let businesses deduct expenses covered by these loans, a change that would cost the state $367 million in revenue for the next fiscal year, according to legislative analysis of the bill.
Typically, federal tax law treats forgiven loans as income and doesn’t allow deductions for the expenses they cover. The IRS initially said expenses covered by PPP loans would be treated this way, but Congress later reversed the policy.
So the bills moving through the legislature would bring North Carolina in line with current federal policy on PPP loans, but not on unemployment.
Sen. Jim Burgin, a co-sponsor on the PPP bill, said the two issues are “apples and oranges” and noted the PPP loans were used to keep people employed. Businesses that kept people on had to cover a lot of expenses, including setting up mobile offices, Burgin said.
“It’s going to be our businesses that get us out of this,” said Burgin, R-Harnett.