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Taxation of Unemployment Benefits, October 14, 2008 1 (October 14, 2008)

handle is hein.tera/crstax0580 and id is 1 raw text is: Order Code RS21356 Updated October 14, 2008 ACRS Report for Congress Taxation of Unemployment Benefits Julie M. Whittaker Specialist in Income Security Domestic Social Policy Division Summary Unemployment compensation (UC) benefits have been fully subject to the federal income tax since the passage of the Tax Reform Act of 1986 (P.L. 99-514). Individuals who receive UC benefits during a year may elect to have the federal (and in some cases state) income tax withheld from their benefits. H.R. 6844 would provide a two-year suspension of the taxation of UC benefits. This report1 provides an overview of the taxation of UC benefits and legislation related to taxing UC benefits. This report will be updated as legislative activity warrants. Overview Unemployment compensation (UC)2 benefits are fully subject to the federal income tax. This tax treatment, which has been in place since 1987, puts UC benefits on a par with wages and other ordinary income with regard to income taxation. In addition to being subject to federal income taxes, in most states that have an income tax, UC benefits are taxed.3 Most other industrial nations also tax unemployment benefits. 'This report was originally written by Christine M. Scott. All inquiries should be directed to the current author listed. 2 In law, this program is called the UC program. However, it is commonly referred to as the UI program, reflecting the social insurance design. For more information regarding the UC program, see CRS Report RL33362, Unemployment Insurance: Available Unemployment Benefits and Legislative Activity, by Julie M. Whittaker. 3 Although most states tax UC benefits, some states exempt the benefits from state income taxes. A few states impose a lowered tax rate on unemployment benefits. Information on a particular state tax treatment of unemployment benefits should be available at the appropriate state tax authority. Congressional Research Service The Library of Congress Prepared for Members and Committees of Congress

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