According to an article in the Star-Telegram, many unemployed Americans are facing unexpected tax bills because they don't fully realize the amount of taxes they will owe on their unemployment benefits.
The article said:
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 are also hit with a state unemployment tax bill.
American unemployment benefits have been fully taxable since 1987; but the impact on those who have faced a job loss has been great. Many jobless Americans are facing a steep tax bill this year because of state and federal taxes on their unemployment benefits--and they're not prepared.
The article quoted a business systems analyst:
"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?"
Taxing unemployed workers receiving unemployment benefits is like squeezing blood from a turnip and is completely counterproductive. Unemployed Americans can barely survive on unemployment benefits that range from a minuscule $400 - $1600 a month depending on where they live and their previous income.
Luckily President Obama's stimulus package includes provisions that make unemployment benefits tax-free up to the first $2,400 of benefits received. This is a temporary, one-time measure that may give jobless Americans a bit of breathing room; but not much. What we really need is a law that makes unemployment benefits completely tax-free so that the unemployed are not going deeper into the whole with tax debt .