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Hot Topic (3/8): Surprise: Uncle Sam's jobless gift has strings - Should unemployment be taxed?

Posted by on Mar. 8, 2009 at 6:21 AM
  • 13 Replies

Did you know that unemployment was taxed? 

Do you think it should be? 

Why or why not?

Surprise: Uncle Sam's jobless gift has strings

A jarring lesson about unemployment: Jobless benefits are taxed

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 like 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 withholding isn't automatic.

The economic stimulus program will temporarily ease the impact 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, like Eric Victorson of Issaquah, Wash., who was "dumbfounded" to learn the impact of taxes.

The 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'd 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 Department of Labor. But tax expert Tom Ochsenschlager said taxing unemployment is "a silly rule" whose impact on the jobless is magnified during a recession.

"Historically maybe (taxation) hasn't been a huge disadvantage for families," said Ochsenschlager, 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 roughly $100 and $400 a week, varying depending on recent pay level, state of residence and other factors.

Those seeking 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."

Inna Shaulskaya, a 29-year-old New Yorker who was laid off from her job as a sales planner in November, learned about the taxes and signed up for withholding. But even with getting the maximum $405 a week for New York state, subtracting the taxes doesn't leave her enough to avoid tapping an emergency fund to pay her mortgage.

Taxing unemployment benefits, she said, is "not logical whatsoever."

"It's actually funny in a way: 'We'll help you out with the unemployment benefits and then we'll take some back!'" she said. "It would make better sense if they just paid less."

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 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, R-N.C., who 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.

Karen Brunke, 41, who was laid off as a purchasing manager twice last year by ailing manufacturing firms, said she "came to a screeching halt" when she read the fine print on her unemployment benefits form and saw the tax warning.

"If I hadn't stopped and read that, I would have ended up owing a lot," said the Coatesville, Pa., resident, who was out of work five months before finding work at a pharmaceutical company.

After the surprise wore off, she was annoyed at the concept of unemployment taxes.

"When my father was laid off in the mid-'70s, they didn't have to pay taxes on that. So if it was good enough for my father's generation, why isn't it good enough for mine?" she asked. "I feel like I'm getting screwed."

by on Mar. 8, 2009 at 6:21 AM
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Replies (1-10):
by on Mar. 8, 2009 at 7:47 AM


by on Mar. 8, 2009 at 10:36 AM

good idea to take taxes out.  psychologically.. if they didn't, the actual check would be smaller and probably the same or less    (jmo)

by New Member on Mar. 8, 2009 at 10:38 AM

I think they should take taxes out. Otherwise it is a free ride. Just because they aren't on welfare.


Zachary                        Kadyn                         Brandon

by on Mar. 8, 2009 at 11:00 AM

Got to read that fine printlol

I just think they should withold the taxes automatically so that you aren't surprised come tax time. 

by on Mar. 8, 2009 at 11:39 AM


 They will either pay taxes out the check or they will have to pay taxes on "untaxed" income when they are preparing their income taxes next year.   I would rather they take the "small" amount taxes from every check.    For instance my dh had $1575.00 in umployment compensation.  They withheld $ 157.50 in federal tax..


by Bronze Member on Mar. 8, 2009 at 11:48 AM

Who do you mean when you say "his speeches?"

As the article said, unemployment money has been taxed for over 20 years. This is nothing new! Wake up people! No one is going to hand you free money. LOL. Unemployment is income. ALL income is taxed. I love that these people are complaining. LMAO! Let's look at the example of someone in New York where the maximum is $405 a week. They are bitching they they get taxed for that?! Are you kidding me! They are at home NOT WORKING and are getting $405 a week! That is the equivalent of working a 40 hour week being paid $10 and hour. Unless I did that math wrong that sounds like a pretty sweet deal. I love how the lady in the article was complaining it wasn't enough to live off of and she'd have to "tap into her emergency fund to pay her morgage." LMAO! An emergency fun IS for something like this! Not having a job and needing to pay your morgage IS an emergency. Geesh! I also love how so many Americans expect the government just to give them free money when they loose their job. What ever happened to being responsible for yourself, saving money for when something unforeseeable comes along? And furthermore, it isn't like these people aren't informed. WAKE UP AND READ THE INFORMATION YOU ARE GIVEN, ALL OF IT!!! Grow up people!

Quoting yiayiaann:


by Member on Mar. 8, 2009 at 1:55 PM

There was something even worse that posted on TOPIX news today:  in order to get unemployment money, people are given a Bank of America credit card that has the money included; however, they are charged interest.

I think that is such a bad idea and it sounds like a "hook" to get them sucked into never-ending credit, also. 

Reading your article just adds to the misery although I would guess that they are thinking people are usually out of work just six weeks or a few months, easily getting another job afterwards.  Thus they should be able to pay taxes on all types of earned income that year.

Not in this economic society, though.

"Little foxes spoil the vines."


by Member on Mar. 8, 2009 at 1:56 PM

CORRECTION:  I think it aired on local or national television, not on TOPIX.  I monitor news in so many sites; sorry for the error.


by Member on Mar. 8, 2009 at 4:17 PM

Well... I am sorry for the guy in the article, but, I live in Washington state too and although I am not unemployed currently, well I am, but I am currently a SAHM; in years past when I did loose a job and drew off my unemployment benefits you are warned on the very first paperwork that you have a choice, you can have taxes withheld OR you can keep track yourself and pay your taxes as you choose when it comes time for taxes and filing the next year.  It's always been like this...why is this something that anyone is acting shocked about?! 

The new stimulus as it is indicated in the post will help those that have recently been unemployed and haven't been paid over $2400 yet, once you hit that point you pay... what is the big deal?!  It's always been that way!!

I am sorry, I think this isn't any different then when anyone was laid off prior to this horrible economic crisis...

If you are going to be upset at a group having to pay taxes, then be upset with the government for taxing Social Security retirees!  They have paid taxes all their lives, worked hard for years upon years... then retire, and then are explained then they will have to continue to pay taxes on their retirement checks; correct me if I am wrong but people that are retiring currently have already paid their fair share of taxes for that exact money that was technically put aside for them for this day when they chose to retire!

by Member on Mar. 8, 2009 at 4:23 PM

What surprise!?  When you sign up for unemployment benefits and even before you get that first check, (at least for the state of Washington, which is where this guy lives and I do too) they Work-source offices make you sign paperwork, first acknowledging you got the paperwork and then also agreeing to what it says and gives you the options EVEN before you get accepted or denied if you want them to take out for taxes or do you want to do it yourself... and then if you do choose to opt to do it yourself... then you have to read and sign again stating you understand you are responsible for paying at the end of the year. 

Quoting cm08:

Got to read that fine printlol

I just think they should withold the taxes automatically so that you aren't surprised come tax time. 

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