Extended Unemployment Is the First Casualty of Sequestration

Starting this month, extended unemployment payments will drop by 10% to comply with sequestration. The cut needed is 5% of the annual amount, but the cut has to be compressed into 6 months, so that’s why the cut is doubled.

Since 1986, unemployment payments have been fully taxable as ordinary income.  The exception is 2009, which provided a $2400 exemption of unemployment payments from federal tax as part of the stimulus package.  If you didn’t take that exemption and you received unemployment payments in 2009, it is not too late.  You have until 15 April to file an amended return.  Amended returns are one of the simpler tax forms.  All that you have to do is fill out the old and new numbers on Form 1040-X, which has to be filed as a paper return, and the IRS website has the form (www.irs.gov). You would get whatever taxes that you paid on that $2400 plus accrued interest from April 15, 2010 until the date that the form is reviewed and processed by the IRS.  You also have the option of filing an amended state return if your state taxes unemployment benefits. If you are owed money at the federal level as the result of filing an amended return, it is common to be owed money at the state level.

The basic rule on filing amended returns is that you have three years from the time that the return was due to file the amended return.   2009 returns were due by April 15, 2010, so you have until April 15, 2013 to file the amended return. An interesting thing about failing to file a tax return is that it extends the amount of time that the IRS has to audit you.  Suppose that you didn’t file your 2011 tax return until December 15, 2012, and you didn’t have an additional extension approved by the IRS.  They would have until December 15, 2015 to audit your 2011 return. Normally, the deadline for an audit where the IRS does not suspect fraud on your part is three years from the time of filing. They can go back six years when they suspect fraud.

There was a huge jump in the number of tax returns with reported unemployment compensation between 2009 and 2010.  11.3 million tax returns reported unemployment compensation totaling $83.5 billion dollars.  2010 saw 14.3 million tax returns report a total of $120.3 billion in unemployment compensation. The higher average amount of unemployment compensation reported in 2010 may reflect the $2400 exemption,  higher-income people losing their jobs, or some mixture of the two.

I don’t believe that unemployment insurance payments should be taxable income. We paid the UI premiums with after-tax money,  so payments should come to us tax-free, much as health insurance payment to doctors.  The argument for taxing unemployment payments is much the same as that for taxing Social Security:  you didn’t pay taxes on the employer’s share of UI tax while you were working.





9 thoughts on “Extended Unemployment Is the First Casualty of Sequestration”

  1. There is a whole list of what I call “weird budget words”. My guess is that the same linguists who decided to call the place where I work a pilot plant, when it will process tens of thousands of items over its lifetime, were the people who came up with sequestration.

    The whole idea behind sequestration is to cause as much pain as possible so that it didn’t go into effect. What we forget at our peril is that the sequestration called for in the Budget Control Act of 2011 is in effect through FY 2022, so it is unreasonable to expect the unemployment payments to go back up to the previous level in October. At best, they will stay at the current level because the 5% reduction required for FY14 was applied in the 10% reduction. They might get a few dollars back, but I wouldn’t bet on it.

    I do have to agree with your view that “the little guy is screwed” because unemployment payments are among the easiest to reduce or end because people expect to go back to work. Most people who get unemployment payments are ineligible for welfare, and will continue to be, particularly if they don’t have children, for quite a long time because the income limits for welfare are so low for single people.

    1. The thing that bothers me about this is how unemployment is treated versus welfare. For example usually one can not get welfare if they quit or get fired for many reasons. For the most part you can only get unemployment if you lose your job through no fault of your own. You also get taxed (mentioned above), have a limited amount of time you can receive it, and have to prove you are looking for a job and willing pretty much to take anything. I received railroad which is a little different but still pretty strict on this, the only exception is I didn’t have to take anything offered, just something along the lines of $30,000 (less money than I made but what they considered a living wage). I received it for a year, got dropped then when the extension got another time limit (I think it was a year but I forget). However both years I had to pay taxes on the amount, which I think was around $800 dollars.

      Compare this to welfare and one can only see why so many people resent those on welfare. I don’t know the rules now but years ago I had friends too lazy to work and had out of wedlock children so they got welfare. They didn’t have to pay taxes and got so many things from food stamps, to medical, section 8, utilities paid, case money, even a gift certificate every month to spend as they chose. If they had more kids they got more money! They didn’t have to prove they were working or cared to work. In one case the father lived with her and he was working so they had additional money. It’s because of the people I know who scammed the system that I am very critical of the welfare system. As I understand it though they have changed it more along the lines of requiring them to work and all of that. However there is one disturbing issue among welfare that is generally not an issue with unemployment and that it the amount of those with out of wedlock pregnancies. This part disturbs me because of all the consequences of it and what many may not know it is hard to get welfare if mom and dad are married.

      That’s why I will never understand why politicians hate unemployment worse than welfare. Unemployment is not rewarding people for poor behavior, it is helping them get on their feet. Welfare is supposed to do that, but all too often it doesn’t.

      1. Did you ever consider that welfare is doing exactly what it is “supposed” to do, which is to keep people who are too stupid out of the workforce, keeping them from messing things up for others? Chances are that your friends who exploited welfare for a short time are no longer on welfare. It isn’t a pleasant life.

        It takes longer to get certain benefits under welfare than you might think. Cash assistance and food stamps can be turned on almost instantly, but one has to wait for a while to get Section 8 housing in most cases. It’s also worthwhile to look up the extra amount that one gets for the second or third child. You might learn that the increase won’t pay for the disposable diapers.

        One reason that politicians may hate unemployment is that having to have it is proof that their efforts to manipulate the economy have failed.

        Another interesting welfare program is SSDI, for the disabled. You’re supposed to be able to keep a portion of those benefits for a period of time to help you go back to the workplace once you find a job that you can do, but the vast majority of people don’t go back to work once they are on SSDI. There’s an interesting report on NPR titled “Unfit to Work” that explores the growth in SSDI over the last 20 years or so.

        1. My one friend is no longer on welfare because I ratted her out for her abusing the system. She changed her view and actually thanked me for doing so. I don’t believe there is such a thing as too stupid to work, there are always (at least until now)jobs like fast food and things like that they could be working. Instead so many who have been on welfare had kids and that bothers me because so many of these kids will also become welfare users, or in gangs, unwed parents themselves and the cycle continues.

          I also know people who received SSDI and like those on welfare many just didn’t want to work. They claimed illnesses (in many cases these were lies)and received disability.

          1. The people who are getting SSDI now can look forward to having their benefits reduced when they turn 62, which they probably don’t expect. If they have enough quarters of coverage, based on the time that they became disabled, they get regular Social Security based on the combination of what they earned while they were working and what they got on SSDI.

  2. I don’t know how it is in other states, but in New York, employees don’t pay for unemployment insurance (i.e. there is no withholding from paychecks). Employers pay Federal and state UI taxes, which they then write off as business expenses. So for me it makes sense that UI benefits are taxable.

    The premise of unemployment insurance is to help tide people over until they are again employed, presumably within a few weeks or months. That premise is now questionable in an economy where job growth–such as it is–is slower than population growth. The jobs are gone, and they aren’t coming back. What do we do now? Maintaining extended unemployment benefits may be throwing good money after bad. But so far, nobody has articulated a plausible alternative. So many people, not having a better alternative, get declared ‘disabled’ and collect SSDI.

    1. The larger point is that regardless of who pays the unemployment insurance premiums, employer-only or shared between employer and employee, I doubt that enough is charged to cover the probable payouts and make the UI program self-funding. If so, the shortfall will have to be provided by the state or federal government.

      Suppose that the normal risk of unemployment is 10 weeks every five years. One would want to collect at least 3 weeks of the anticipated benefit every year to be able to pay out the benefits and run the program. Presuming that the UI program spends 33% of revenues on administration costs might seem high, and it might well be, but remember that UI payments are a fraction of one’s regular pay in most cases and the people running the program are getting their full salaries, whatever they are,

      I had money withheld from my pay in 1977 for unemployment insurance when I worked in New Jersey. This is old, probably out-of-date information. Looking up information on the Colorado.gov website indicates that there is a payment for unemployment insurance premiums from the employer, but not necessarily from the employee. A way to avoid paying unemployment taxes on the employer’s side is to hire all employees as contractors. I’ve reviewed invoices from the company that runs the plant where I work where they are charging the government for unemployment insurance premiums (as well as disability insurance).

  3. Unless one is terminally ill or has no prospect of recovery (i.e certain mental illnesses, paralysis, etc.), the process of getting SSDI is quite long. Less than half of applicants get it the first time that they apply. This is one reason that there are so many lawyers who specialize in disability law.

    Even if one DOES get SSDI, it is a two-year wait to qualify for Medicare. They might qualify for Medicaid immediately if their previous income and assets are low enough, but it is hard for unmarried people without children to qualify for Medicaid.

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