D.C. residents forced out of work suddenly by COVID-19 could be in for another unpleasant surprise this year: a large tax bill.

That’s because unemployment benefits — the sole source of income for many city residents during the crisis — are not exempt from federal or D.C. income taxes. Come April 15, recipients who didn’t opt to withhold taxes from their benefits will have to pay a tax bill they may not have planned for.

But the D.C. Council appears ready to pass legislation that would exempt unemployment benefits from some taxes in 2022. A majority of District lawmakers have signed on to a measure from Councilmember Elissa Silverman (I-At Large) that would exempt unemployment benefits from D.C. income tax, bringing some relief to out-of-work residents — though not until next year.

It’s too late for the council to pass a bill for this year’s taxes, says Sam Rosen-Amy, Silverman’s chief of staff, because the legislation wouldn’t be able to cross the finish line until well after tax season. The measure would apply to unemployment income from D.C., Maryland, Virginia or any other state. Federal income tax would still apply.

But the broad tax exemption could come at a high cost to the District. Unemployment claims in D.C. hit a record high last year and thousands of residents continue to draw benefits as many businesses — particularly in the hospitality sector — have closed or scaled back operations.

Rosen-Amy says it’s difficult to estimate how much revenue the city would lose under the bill because tax filers report unemployment income with the rest of their regular income, and it’s not immediately clear how much of it would be subject to the exemption. The District paid out a record $1.57 billion in unemployment benefits in 2020, according to the city’s chief financial officer. More than half of that — $970 million — was federally funded. That total also includes benefits paid to non-D.C. filers, who would not be eligible for the city tax exemption.

Silverman’s chief of staff says the fiscal impact could be similar to that of Delaware, which exempted unemployment from state taxes at an estimated cost of $18.8 million this fiscal year and $6 million next year.

“We know [the exemption] will probably be relatively expensive, which is why we didn’t do it earlier. But [Councilmember Silverman] was surprised to learn that we ended last year with a $500 million surplus, meaning we probably could have easily afforded this last year,” Rosen-Amy writes in an email to WAMU/DCist.

Unemployment income is exempt from state income tax in Virginia. In Maryland, the newly signed RELIEF Act exempts unemployment from state taxes in the 2020 and 2021 tax years, but only for individuals who earn less than $75,000 annually and jointly filing couples who earn less than $100,000.

On the national level, advocates are urging Congress to pass a federal tax exemption for unemployment. Roughly 40 million Americans received more than $580 billion in benefits last year, according to the Century Foundation. The progressive think tank estimates that fewer than 40% of those payments had taxes withheld, meaning millions of Americans could face unexpectedly large tax bills this spring.

“At a time when millions are unemployed, when families continue to face food and home insecurity, Congress and the Biden administration must act urgently to prevent these surprise tax bills, and to allow millions who have already paid tax on their 2020 benefits to receive a timely refund check,” the Century Foundation wrote in a recent report.

A bill sponsored by U.S. Sen Dick Durbin (D-Ill.) and Rep. Cindy Axne (D-Iowa) proposes nixing federal income taxes on the first $10,200 in benefits. Sen. Bernie Sanders (I-Vt.) has called for wholesale tax forgiveness on unemployment income. If Congress doesn’t act, the Treasury Department could issue a rule exempting benefits from federal income taxes, according to the Century Foundation.

Silverman is expected to introduce her local tax exemption bill Tuesday. As of Monday, the measure was supported by 11 of 13 D.C. councilmembers, meaning it could survive a veto from Mayor Muriel Bowser.

The at-large councilmember, who chairs the council’s labor committee, recently advocated for putting more of D.C.’s cash reserves toward direct aid for struggling residents.

“Hoarding cash when our residents and businesses are in economic death spiral is not responsible,” Silverman told D.C. CFO Jeffrey DeWitt during a discussion of the city’s finances. “I think we should be pulling out all of the stops, spending our tax dollars to stabilize residents, workers, businesses, especially those in hospitality and entertainment where the pandemic has just crushed them.”

This story has been updated to reflect that Councilmember Silverman’s bill is now supported by 11 of her colleagues, up from 10, and that Maryland exempted unemployment benefits from state income tax — for income-qualified residents — with the RELIEF Act.