Wednesday, February 18, 2009

Get ready to pay taxes on your unemployment insurance payments

Kiplinger reminds us that the weekly unemployment insurance checks that people are receiving is actually taxable income---So when you start putting together your tax return for this upcoming April 15th, you may be shocked that you need to cut a check to the IRS even though you're unemployed.

Unemployed But Not Untaxed
Wednesday, February 18, 2009; 12:00 AM

For the more than 11 million Americans out of work, tax filing time can be a mixed blessing. For some, reduced income may mean a big refund check just when they need cash the most. For others, tax time can be shocking when they realize that the unemployment checks they have been receiving are taxable -- and they haven't had any taxes withheld.

If you lost a good-paying job late last year, it could mean that you are still in the same tax bracket as when you were employed, says Mark Luscombe, principal federal tax analyst for CCH, a provider of tax information and software.

For example, if you had an annual salary of $120,000 and were laid off in the fourth quarter after receiving $90,000, there's a good chance that you'll still be in the 28% federal tax bracket. Plus, any unemployment benefits you received in 2008 probably will be taxed at that 28% rate. "It may not seem fair given that you're not working, but the income tax rate is based on your total income, whether you earned it from salary or unemployment benefits," Luscombe says.

Those who have been unemployed for a longer period probably will be in a lower tax bracket. But they, too, are required to report all income and pay taxes based on their overall income level.

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