These Are Teachable Moments If Someone Was Willing to Teach ... and Anyone Is Willing to Listen.

In the early '80s, unemployment "insurance" distributions were not taxed. Now, they are ... and yes Reagan began taxing them. Just one more case of the Federal Government kicking people when they are down. The business of the government giving money to help people and then taxing that help, is very Orwellian in “logic”.

Just remember ... Your government will send you a check (unemployment, rebate, etc) which includes money you will owe back to them after you fill out the paperwork. Why not just send what they can keep and keep the tax? Inefficient and wasteful government in action.

Time for radical tax reform ... the FairTax, although not perfect, is the best option currently.


A Painful Tax: Some unemployed shocked to learn taxes aren't withheld from benefits


CHICAGO - Some Americans are learning a jarring lesson about unemployment as they prepare their tax returns.

At a time when the newly laid-off are swelling unemployment rolls to record numbers, the painful surprise for many is that jobless benefits are taxed as income. That leaves many on the hook for hundreds or thousands of dollars because the taxes aren't automatically withheld from benefit checks.

To make things worse, some people also are hit with a state unemployment tax bill.

The tax is no government secret -- unemployment benefits have been fully taxable for more than 20 years. But many complain that they aren't properly informed about the tax or the fact that withholding isn't automatic.

The economic-stimulus program will temporarily ease the effect by eliminating federal income taxes on the first $2,400 of unemployment benefits received this year. It's a one-shot break, though, and the boost may last for just a few weeks.

The exclusion won't immediately help people who lost their jobs last year, such as Eric Victorson of Issaquah, Wash., who was "dumbfounded" to learn the effect of taxes.

Victorson, a 35-year-old business-systems analyst, was laid off in October, forcing him to get by on a $541-a-week unemployment check after making three times that from Microsoft Corp.

He didn't realize the tax jolt he would get until this year. What would have been a $2,900 refund was whittled to $1,400 -- halving an amount he needs to help him get by while he looks for a new job.

"I knew I'd have to pay something, but to think I was going to get gouged $1,500 for three months' unemployment," he said. "What if I was out the whole year?"

Unemployment taxes netted $7.2 billion for the federal government in fiscal 2008 and $32.4 billion for state governments, according to the U.S. Department of Labor. But tax expert Tom Ochsenschlager said that taxing unemployment is "a silly rule" whose effect on the jobless is magnified during a recession.

"Historically maybe (taxation) hasn't been a huge disadvantage for families," said Ochsenschlager, the vice president of tax for the American Institute of Certified Public Accountants. Taxing unemployment benefits right now, he said, is "trying to get blood out of a turnip."

Unemployment compensation typically ranges between about $100 and $400 a week, varying depending on recent pay level, state of residence and other factors.

Those wanting to minimize tax-time problems can request that income taxes be withheld from their unemployment checks or simply set money aside to make sure they can pay the taxes by April 15, if it's feasible.

But that may be difficult, since, as Victorson noted, "the money barely is enough to survive on as it is."

It hasn't always been this way. Unemployment compensation was tax-free until 1979, when the government made it partly taxable. The move came after some policy studies found that tax-free paychecks reduced the incentive to find a job.

Congress then made benefits fully taxable in 1987. The $787 billion economic-stimulus package signed into law last month is the first time since then that the tax has been even temporarily eased.

The 2009-only change wasn't enough for some, however.

"Taxing those seems like a really crazy practice to me," said U.S. Rep. Virginia Foxx, a Republican who represents North Carolina's 5th District. She is sponsoring legislation to get rid of all federal income taxes on unemployment benefits. "It's like giving with one hand and taking with another. I just think it's unfair to tax the benefits of these people who are struggling to find work, particularly in a difficult economic time."

Foxx admits, however, that chances for her legislation passing in this environment are not strong.

The problem for some consumers stems from how they are notified about the taxes. States are required to offer the option of withholding federal income taxes from unemployment checks. But each state determines how to do that.

Josie06 Josie06
56-60, F
3 Responses Mar 6, 2009

No problem katy. It affects us all in different ways.<br />
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However, the US Tax Code is a monster that takes more than it gives away. Written by the lawyers we send to Congress.

i know it is affecting everyone this year. Not just those getting unemployment are paying more. My only only guess would be the rebate for many. i don't know for sure. <br />
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My friend here, CPAGuy, could most likely explain it without any problem. Hopefully he'll see this story and comment.

All I know is that right now my husband and I are taking every penny we get and trying to pay off debt so that when inflation and higher taxes hit will can make it from week to week.