How to exempt 2021 unemployment benefits from Delaware income tax

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For the second year in a row, Delaware taxpayers will be exempt from paying state income tax on their unemployment benefits.

Gov. John Carney on Thursday signed legislation introduced by Rep. Ed Osienski on the 2021 tax relief. Osienski, a Democrat from Newark, sponsored a similar bill last year.

Since March 2020, Delaware has experienced unprecedented levels of unemployment. Between March 2020 and last December, the Delaware Division of Unemployment paid 107,195 people more than $1.5 billion in benefits. In 2019, the state paid $67 million, according to a press release on the bill.

As the economy and daily life attempted to return to normal, unemployment persisted last year. The state received 103,380 unemployment claims in 2021 compared to 175,387 claims in 2020.

This year’s tax holiday is expected to cost the state about $25 million over two years, according to an official financial analysis of the bill.

Delaware began processing tax returns on January 31. The deadline for filing personal income tax returns in Delaware is April 30.

How to exempt your benefits

Residents filing a Delaware tax return should list the amount of unemployment benefits they received in 2021 on line 7 of their tax form.

Nonresidents filing a Delaware tax return should enter the amount of unemployment benefits they received in 2021 on line 25.

Unemployment benefits must be included in adjusted gross income and will still be taxed federally.

The Unemployment Division has mailed 1099-G tax forms to report benefits paid in 2021. Electronic copies are not available, according to a Labor Department spokesperson.

How much money will this save me?

The IRS began accepting and processing 2021 federal tax returns on January 24.  Delaware tax season began on January 31, and the deadline to file Delaware personal income tax is April 30.

Your tax savings will depend on how much money you earned in unemployment and how much money you earned in total income last year.

If lawmakers hadn’t granted the exemption, the state would have taxed your unemployment benefits at the tax rate on your total income last year. Your total income includes your unemployment benefits.

Delaware income tax brackets are currently at these rates:

  • 2.2% on income between $2,000 and $5,000
  • 3.9% on income between $5,000 and $10,000
  • 4.8% on income between $10,000 and $20,000
  • 5.2% on income between $20,000 and $25,000
  • 5.55% on income between $25,000 and $60,000
  • 6.6% tax on income over $60,000

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Help for businesses

The bill also sets the 2022 new employer assessment rate, the industry average assessment rate and the construction industry average assessment rate at the same rate as in 2020. This is to avoid an increase in these rates due to the increase in unemployment claims. Lawmakers also implemented this 2021 rate freeze.

During the first two years of registration, companies are taxed on the basis of the average unemployment tax rate instead of their individual rate. The state does not want these employers to pay the price for the overall increase in claims volume, officials say.

Still have questions about the exemption?

More information will be posted on revenue.delaware.gov.

You can also call the Delaware Department of Revenue Georgetown Public Service Group for assistance at 302-856-5358.

The bill also gives the Labor Department broad emergency authority.

The bill would also allow the head of the Department of Labor to issue emergency rules through December 2022 to address the effects of the pandemic on unemployment and implement federal programs that provide unemployment benefits in response to COVID-19.

The department had that ability last year, thanks to the exemption bill passed by lawmakers in 2021. The authority was due to expire in March. The department issued several emergency rules last year, including reinstating a requirement in June that recipients actively seek work.

The authorities are not currently considering emergency rules for 2022, according to its spokesman Alejandro Bodipo-Memba.

The department requested the emergency authority due to the uncertainty of the pandemic’s impact on the Unemployment Insurance program and the federal government’s ability to issue new rules when state lawmakers are not not in session, Bodipo-Memba wrote in an email.

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Sarah Gamard covers government and politics for Delaware Online/The News Journal. Contact her at (302) 324-2281 or [email protected] Follow her on Twitter @SarahGamard.

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