Tax on jobless benefits often a surprise to unemployed

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 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.

Unemployment taxes netted $7.2 billion for the federal government in fiscal 2008 and $32.4 billion for states, 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 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.

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