The Times Herald (Norristown, PA)
Color of Money
Like so many others, the Madison, Wisconsin, woman complained about the taxation. “I’m not choosing to be in this position,” she said. “I’m also not collecting that much in a week.”
Until 1979, unemployment benefits were taxfree.
But the Revenue Act of 1978 set a threshold at which unemployment compensation would be taxed. Benefits were taxable only for single tax filers whose adjusted gross income exceeded $20,000, or $25,000 for joint filers.
The rationale behind the taxing benefits in the late ‘70s is the same for reason many Republicans who have argued recently against extending the extra $600 a week under the Cares Act. They want to discourage people from relying on unemployment benefits. During the taxation debate, policymakers relied on research that made the absurd conclusion that taxing unemployment benefits would encourage people to look for work, according to a 2015 report by the Congressional Research Service.
Practically, this makes no sense for the jobless. Eventually, unemployment runs out. “If an unemployed worker waits until he is near the end of his eligibility for benefits to consider re-employment, he risks considerable discomfort,” one researcher countered in a paper published in the National Tax Journal in 1976. “Further, it has been shown that a spell of unemployment lowers expected subsequent earnings.”
Nonetheless, legislators of the Carter and
Reagan eras pressed on with their faulty reasoning in reducing unemployment benefits. And, as part of the Tax Reform Act of 1986, unemployment income became fully taxable. It is not, however, subject to Social Security and Medicare taxes, because the payments are not considered to be earned wages.
Given the severity of the current economic downturn, Congress should at the very least pause the taxation of unemployment as it did during the Great Recession.
For tax year 2009, the American Recovery and Reinvestment Act excluded the first $2,400 in unemployment benefits from income taxes.
Nobody is getting rich off collecting unemployment.
“I’d rather be working,” said Meyer, 29. “Getting on unemployment is already such a circus. It’s still work to be unemployed. You still have to apply for jobs. You have to notate that. You have to file every week. I can’t imagine anyone willingly being on unemployment for an extended period of time. Not working has just been the most awful experience of my life.”
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