Millions of unemployed Americans are facing surprise tax bills, ranging from several hundred to several thousand dollars, and many say they just can't pay.
For tax purposes, weekly unemployment payments count as income just like wages from a job.
But few people realize the money they get from the government is actually taxable.
Fewer than 40% of the 40 million unemployed workers in 2020 had taxes withheld from their payments, according to The Century Foundation, a left-leaning think tank.
For people who have been without a job for nearly a year, finding money to pay their tax bills is yet another financial burden coming at a fraught time.
Advocates for the poor as well as some Democratic lawmakers are trying to get these tax bills waived entirely -- or at least reduced.
"I don't think we should be taxing unemployment insurance benefits, generally, but we really should not be taxing them during a terrible recession," said Brian Galle, a professor at Georgetown Law. "The right thing to do is just zero out unemployment insurance income from last year."
Among the unemployed, there was hope that Congress would eliminate taxes on unemployment income, but that provision did not make it into the latest $1.9 trillion bill Democrats are aiming to have on President Joe Biden's desk by mid-March.
Unemployment insurance was created in 1935 during the Great Depression era as a safety net to help people who were out of work. For decades, it was not taxed, but in the late 1970s and early 1980s there was a push to make all forms of income taxable.
"The basic theory is everyone should pay tax on it as income. Just because they are unemployed doesn't change that," said Pete Davis, who worked on tax reform in the 1970s and 80s in Congress.
Outside of a recession, Americans usually remain on unemployment for a few months, so the tax bills are modest.
But during recessions, or large-scale natural disasters, it's more common for people to be unemployed for a year or more, causing a much heftier tax bill. That's why Congress has typically eliminated at least some of the tax bill for the unemployed during past downturns as a way to lessen the financial pain.
States handle taxation of unemployment benefits in very different ways. Nine states don't have income taxes, so they don't tax unemployment benefits. Another six states -- Alabama, California, Montana, New Jersey, Pennsylvania and Virginia -- opted not to tax unemployment at the state level. And during the pandemic, Maryland and Delaware decided to temporarily not tax unemployment, according to Lucy Dadayan, a senior research associate at the Tax Policy Center.
In Congress, Sen. Richard Durbin, D-Ill., and Rep. Cindy Axne, D-Iowa, have introduced separate legislation that would eliminate taxes on the first $10,200 of unemployment benefits received in 2020.
This proposal is similar to what Congress did during the Great Recession when a portion of unemployment income was not taxed. So far, the bill has not advanced.
Opponents of the Durbin bill argue that it is a costly provision -- estimates are around $30 billion -- and the money is better spent elsewhere.
They say it would be wiser to extend unemployment insurance benefits longer to continue helping those deeply in need.
Lowering taxes now on 2020 unemployment aid would help a lot of people who have already returned to work, critics say.
"The important policy question is: Who is falling through the cracks?" said Jared Walczak, a vice president at the right-leaning Tax Foundation. "The priority should be making sure there's uninterrupted benefits for those in need."
Time is running out for Congress to make tax changes to help with the tax filling season underway since Feb. 12.
Information for this article was contributed by Jeff Stein of The Washington Post.