HR 2655119th CongressIn Committee

To amend the Internal Revenue Code of 1986 to sunset the Federal income tax on unemployment compensation.

Introduced: Apr 3, 2025

Standard Summary

Comprehensive overview in 1-2 paragraphs

H.R. 2655 would permanently remove the federal income tax on unemployment compensation beginning with tax years after 2024. Currently, unemployment benefits are included in a recipient’s gross income and taxed at federal rates. The bill rewrites the relevant provision of the Internal Revenue Code (Section 85) to say that unemployment compensation will not be included in gross income for taxable years beginning after December 31, 2024. In practical terms, starting in 2025, individuals receiving unemployment benefits would not owe federal income tax on those benefits. The bill does not specify any offsets or revenue replacements to cover the foregone federal revenue.

Key Points

1Sunset of tax on unemployment benefits: Beginning with tax years after December 31, 2024, unemployment compensation is no longer included in gross income for federal income tax purposes.
2Legislative change to IRC: The bill amends Section 85(c) of the Internal Revenue Code by removing the current inclusion in gross income and replacing it with a provision stating the tax does not apply to taxable years beginning after 12/31/2024.
3Effective date and administration: The change applies to amounts received after 12/31/2024 and in taxable years ending after that date. It would require IRS guidance and potential updates to forms (e.g., how unemployment benefits are reported on Form 1099-G remains, but the tax impact would be zero).
4Revenue impact: The change would reduce federal tax revenue by the amount currently raised from taxing unemployment compensation. The text does not specify offsets or a phase-in.
5Scope of impact: The bill affects only the federal income tax treatment of unemployment compensation. Other taxes (state income taxes on unemployment benefits, payroll taxes, etc.) are not addressed by the bill and would remain as is.

Impact Areas

Primary group/area affected: Individuals who receive unemployment compensation starting in 2025 and later, who would see federal income tax withheld on those benefits eliminated, increasing their after‑tax income.Secondary group/area affected: The federal budget and revenue baseline, since removing the tax on unemployment benefits reduces federal tax receipts unless offset by other measures.Additional impacts: Potential downstream effects on state tax treatment of unemployment benefits (which varies by state) and on administrative guidance, withholding practices, and tax forms. The change could influence debates about unemployment benefits design and labor market incentives, though the administrative effect on labor supply is expected to be modest.

Generated by gpt-5-nano on Nov 18, 2025