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Monday, June 28, 2010

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The Tax Consequences of Unemployment
Losing your job is a nightmare. Unfortunately, this has happened to millions of Americans the last few years as we've gone through the Great Recession. With a reported unemployment rate of nearly 10 percent and a "real" unemployment rate of over 17 percent, it has been a tough time for just about everyone. Many are relying on help from the government, but there are tax consequences to that help.

There is an old saying. Be very afraid when the government comes a calling. "I'm from the government and I am here to help" are words that many view with foreboding. This is often the case when it comes to unemployment. The government provides citizens with a safety net in the form of unemployment benefits. There is only one small problem...you have to pay income tax on them!

Yes, you read that right. You've paid into the unemployment fund all those years you've been working. Now that you need to tap the fund in a dire time, you are going to have to pay income tax on the benefits you get. Amazing, no? Most people don't realize this and get stuck with a tax bill at the end of the year that they simply can't pay. This puts them in a deeper hole, which is just about the last thing they need.

Can you set up withholdings from each unemployment check to avoid the problem? Yes, but there is a huge caveat you have to understand. The withholding is in the amount of 10 percent. This is problematic. Why? Nobody pays taxes at a 10 percent level! Put another way, you are still going to end up owing more money when tax time rolls around. This doesn't even cover the taxes you might owe to your state on the benefits.

Don't get me wrong. Unemployment benefits have helped a lot of people get through tough times. When you are trying to keep a roof over your head and food on the table, the tax consequences of unemployment benefits are the least of your worries. Still, it is something to be aware of and another example of the maddening policies of our government.

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