What Taxes Do You Pay on California Unemployment?
Unemployment benefits in California help you through the financial uncertainty of being out of work and struggling to find a new job. However, the benefits are not entirely yours to keep --- taxes, for example, reduce the net amount of your benefits. According to the tax code, benefits are income, and thus you owe taxes on them as you would with earnings from employment.
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Federal Taxes
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The Internal Revenue Service requires you to pay taxes on your unemployment benefits. Your income tax bracket determines the percentage of benefits you owe in taxes. In 2011, the federal tax brackets were 10 percent for incomes up to $8,500, 15 percent for incomes up to $34,500 and 25 percent for incomes up to $83,600. Higher tax brackets included 28 percent, 33 percent and 35 percent. Your tax bracket depends on your overall income, which includes any earnings from employment, interest and dividend income, unemployment benefits and your spouse's income if you file a joint return.
State Taxes
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Some states join the federal government in levying taxes on unemployment benefits. California, however, does not impose a state tax on benefits, although it is among the states that tax most forms of income. When you tally your income on your state return for the purpose of calculating your taxes, the instructions will tell you to disregard your unemployment benefits.
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Considerations
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You may reduce or eliminate the amount you owe on tax day by instructing your local unemployment office to withhold taxes from your benefits. This arrangement is the equivalent of withheld income on earnings from employment. The withholding on benefits is automatically 10 percent even if you expect to be in a higher tax bracket. You also may choose to have no withholding if you think having more money for day-to-day expenses while unemployed is worth the higher payment you will have to make at tax time.
History
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Before the late 1970s, nobody owed federal or state taxes on unemployment benefits. The Revenue Act of 1978 made benefits taxable for claimants whose adjusted gross income was more than $20,000 for single filers or $25,000 for married couples filing jointly. According to a 2005 report by a member of the Congressional Research Service, the thinking was that the lack of taxes on unemployment benefits diminished the incentive to get off benefits and find work. Legislation in 1982 lowered the income threshold to $12,000 for singles and $18,000 for married couples filing jointly. In 1986, the Tax Reform Act made unemployment benefits at the federal level for everybody regardless of overall income.
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References
- California Employment Development Department: FAQ -- Collecting Benefits
- Bargaineering: Official 2011 U.S. Income Tax Brackets (IRS Tax Rates); Jim Wang
- California Tax Service Center: Special Circumstances
- Cornell University ILR School; "Taxation of Unemployment Benefits"; Christine Scott; Jan. 14, 2005
Resources
- Photo Credit tax forms image by Chad McDermott from Fotolia.com
