Why, are unemployment benefits taxed at 30% (+/-) and captial gains taxed at 15%?

[geckosfeet]

What is the logic here? How did this come to be?

The unemployed pay more in taxes on the unemployment pittance they need to survive, while the generally well off (if not filthy rich) pay 15% on investment income that they stash away or re-invest.

[jody]

1. Please provide a link to IRS supporting your assertion "unemployment benefits taxed at 30% (+/-)" nt

[Travis_0004]

6. Its is taxed at a normal income rate

I don't have a specific link, but i can tell you the OP is correct. If you receive unemployment, you will receive a 1099-G, and claim it as income. I believe you can deduct the first 2400, but I would have to double check that.

So the 30% figure is a bit high. If somebody only received unemployment, there is a decent change their 'average' tax rate would be a bit lower than 30%, so the 30% guess is a bit high.

If somebody was only on unemployment for a short while, than their 'marginal' tax rate could be around 30% (more likely 25%), so I would say that is a decent guess.

[jody]

7. Please provide a link. nt

[rfranklin]

9. What's your point? This has been common knowledge for the past twenty years...

If you were making $100,000 for most of the year and then went on unemployment for the last two months, you could pay 28% tax on your benefits. However, it's just aggravating that something that is supposed to be "insurance" is taxed as income. If you collect on someone's life insurance, there are no taxes.

If you received unemployment compensation during the year, you should receive Form 1099-G (PDF) showing the amount you were paid. Any unemployment compensation received during the year must be included in your income, unless you contributed to the fund.
http://www.irs.gov/taxtopics/tc418.html

"It's a wage payment; you have to pay taxes on wages," says Barbara Moore, an attorney and unemployment law analyst with CCH, an information provider on taxes and other business issues. In fact, you -- and the IRS -- should get a 1099-G detailing how much you received in unemployment.

But there's one bit of relief in this area on 2009 tax returns. The American Recovery and Reinvestment Act that became law last February exempts the first $2,400 in unemployment benefits from federal taxation.

Any unemployment in excess of that, however, is still taxable. And unless the worker requests it, states don't have to take out withholding from unemployment checks. When a person is trying to figure out how to pay next month's mortgage or rent, paying the taxes on those benefits tends to drop down the priority list.


Read more: Losing your job can be taxing http://www.bankrate.com/finance/money-guides/tax-help-after-a-layoff-1.aspx#ixzz1kDBmKzkk

[jody]

11. 1. Please provide a link to IRS supporting your assertion "unemployment benefits taxed at 30% (+/-)"

[Travis_0004]

15. In the time it took you to post this 3 times, you could have found the link.

But, I found it anyway. IRS Topic 418

http://www.irs.gov/taxtopics/tc418.html

As I said in my previous post 30% is a bit high, but I'm sure there are some individuals that pay 30% on their unemployment taxes, but they would have to be making a lot of money. If somebody was single and making 35K a year, then their marginal tax rate on unemployement taxes would be 25% on all income above 35K.

Most people on unemployment are probably paying a marginal rate of 15% on their unemployment taxes. Unemployment is also not subject to FICA taxes, so there is a 7.65% tax break there as well compared to income.

[jody]

17. Please reread my question. You have not provided a link proving average tax rate is 30%

as the OP stated.

Since you have spent so much time looking for an answer without success, perhaps the answer is that it is not 30% and could be very low.

Thanks for at least trying to find an answer.

[geckosfeet]

30. The rate varies with income. It could indeed be 30%. Or more.

[jody]

34. See my #32 nt

[geckosfeet]

28. Point is Reagan used this tax to fund investment income tax breaks.

[dsc]

10. Go to page 10

http://www.irs.gov/pub/irs-pdf/i1040.pdf?portlet=103

Go to line 19

http://www.irs.gov/pub/irs-pdf/f1040.pdf?portlet=103

Clear as day it is taxed as ordinary income. I will dispute the 30% rate since that would require a quite high income I think that it is more likely it is taxed at 15% or the middle rate of 22%

[jody]

13. There's a difference between marginal tax rate and average tax rate. OP didn't make that distinction

[dsc]

61. the marginal rate is what would be relevant here

for that is the difference in taxes that they would be paying. More accurately the marginal rate at every dollar amount that is above the income they made without counting the benefits. It would, at most be two rates. I would imagine most is taxed at either 0%, person was poor enough not to pay any tax, 10% bottom bracket, or 15% next bracket up. But the 0% is misleading if we are talking about somebody who qualifies for the EIC. Then it could be a plus or a minus for them depending on income level.

[dems_rightnow]

14. Or even 0% or 10%

Given that per the OP they "need it to survive".

[geckosfeet]

19. Heres one.

http://articles.boston.com/2012-01-21/business/30647622_1_job-search-unemployment-benefits-expense-deduction

Use the damn google.

[jody]

22. You did not answer my question. Thanks for trying though. nt

[geckosfeet]

27. Ha. No problem. Like I said, use the google.

[jody]

35. Not everything found by google is true, but you already knew that -- didn't you? nt

[daleanime]

2. Often, the question is the answer.....

the U.S. government is owned by and works for the 'filthy rich', not the working(or looking for work) people.

[valerief]

3. So rich people can keep more of their money to buy islands and jets. nt

[Travis_0004]

4. Here is what I was taught in my tax class.

The logic is unemployment benefits are considered income, so it is taxed as such.

The reason behind the lower tax rate on capial gains is due to the fact that a lot of the gain is due to inflation, so it is a nominal gain, not a real gain. If inflation goes up 3% a year, and a you gain 5%, your only true profit is 2%.

The lower rate is also supposed to encourage long term investing, which is good for the economy. A lower rate also allows investors to more easily move money from one investment to another one, which provides more liquidly to the market, and since capital gains are not paid until the gain is realized, the government can get its tax payments sooner, since with a higher capital gain rate an investor would be a bit more likely to hold on to the investment (and wouldn't pay taxes on it yet, since if a gain is not realized, it is not tax.

I'm not saying you have to agree with these ideas, I'm just saying that is the logic behind it.

And don't imply that i agree with with it. If unemployment was 100% of a persons salary, I would be fine taxing it. At least while they are looking for a job, their income would be the same. But as we all know, unemployment is not 100%, so their income is already going down quite a bit when they loose their job. Not taxing that smaller income would be a very small step to helping them get by a tough time.

[geckosfeet]

21. Yes. But unemployment benefits were not always taxed.

Apparently this started in 1987. Under Ronald Reagan. Surprise surprise.

http://en.wikipedia.org/wiki/Unemployment_benefits#United_States

Unemployment compensation has been taxable by the federal government since 1987.[43] Code Section 85 deemed unemployment compensation included in gross income.[44] Federal taxes are not withheld from unemployment compensation at the time of payment unless requested by the recipient using Form W-4V.[43][45] In 2003, Rep. Philip English introduced legislation to repeal the taxation of unemployment compensation, but the legislation did not advance past committee.[43][46] Most states with income tax consider unemployment compensation to be taxable.[43] Prior to 1987, unemployment compensation amounts were excluded from federal gross income.[47] For the US Federal tax year of 2009, as a result of the signing of the American Recovery and Reinvestment Act of 2009 signed by Barack Obama on February 17, 2009 the first $2,400 worth of unemployment income received during the 'tax year' of 2009 will be exempted from being considered as taxable income on the Federal level, when American taxpayers file their 2009 IRS tax return paperwork in early 2010.

[jody]

47. "unemployment benefits were not always taxed" and before 1913 and the 16th amendment, income taxes

should also be included.

[customerserviceguy]

48. Nope, started taxing UC way before that

First started in the late 1970's, and they set the limits at something looked fairly large by a lot of working people. Bob Dole made sure that the limits came down during the Reagan adminstration, but they still left a lot of the poorest folks without tax liability on UC benefits. I think it was during the Clinton administration that they became 100% taxable.

I don't practice tax law anymore, but I used to be an Enrolled Agent back in the 1980's.

[handmade34]

5. uh... because the wealthy write the rules... n/t

[tawadi]

29. +1

[former9thward]

8. Unemployment benefits are not taxed at 30%

To be taxed at that rate you would have to be making 200,000 a year. Not too many people making 200k a year are collecting unemployment. Most unemployment is taxed at effective rates of 0 to 15%.

[Progressive dog]

16. The point is that unemployment benefits can be taxed at 30%

Also, assuming rational investors, money invested will be moved when it makes financial sense to the investor. When capital gains rates are lower the long term (10 year) amount collected in capital gains taxes is less. It only increases in the short term.
Earned interest is taxed at the same rate as earned income with no provision for inflation. The lower capital gains rate is obviously a special benefit for those with large amounts of capital.

[former9thward]

18. Yes I get the point but I don't mind people making 200k a year

getting their unemployment taxed at 30%. I do happen to think capital gains should be taxed at a lower rate than earned income. If you invest you are taking a risk so the tax rates should reflect that. Also most capital gains have already been taxed at the corporate rate of 35% before they are distributed.

[Progressive dog]

36. Bury your capital in your mattress then

Even if the 35% was the real tax rate for corporations, the corporation has to dispose of capital (sell it) to be taxed for a capital gain. They can depreciate their investments over their lifetime and deduct depreciation from their income. In other words, they can transfer some income to the capital gains rate if they realize a gain over the depreciated value when they dispose (sell) the capital goods. Your statement is wrong.
Capital gains are only realized when you move the money, so capitalists can choose when to pay these taxes, unlike earned income.

[former9thward]

39. Statement is not wrong.

By definition if an investor has received capital gains then a corporation has "moved the money". So it has been taxed once. Thank you for your financial advice but I think I will do just the opposite.

[Progressive dog]

50. That doesn't make any sense

By whose definition?

[geckosfeet]

23. I think that unemployment benefits are taxed at you normal tax bracket rate.

http://articles.boston.com/2012-01-21/business/30647622_1_job-search-unemployment-benefits-expense-deduction

Collecting unemployment insurance benefits? All that you received in 2011 is taxed as income. Unless you requested that federal taxes be withheld, you could be in for a big surprise when you calculate taxes owed.

"People tend to believe unemployment benefits are still not taxable," said Bob Meighan, a vice president at TurboTax. That was the case in 2009, for the first $2,400 in unemployment benefits. But that provision was not renewed by Congress.

If it is any consolation, you may find yourself in a lower tax bracket because of reduced income, even counting the unemployment benefits. And you might also be eligible for tax breaks that you didn’t qualify for before.

[jody]

32. You must not confuse marginal tax rate with average tax rate. If someone has earnings and then draws

unemployment it will be taxed at a marginal rate.

I agree if a person had earned perhaps $75k in a year and then drew unemployment it could be taxed at 30%.

IMO such a person is not close to being destitute.

If a person subsisted only on unemployment, she/he would pay perhaps 10% as a base rate increasing to your 30% if their unemployment was in the range of $75k.

IMO a person drawing $75k in unemployment is not destitute.

[former9thward]

37. Exactly, so if you are being taxed at 30% then you are making around 200k a year.

[geckosfeet]

25. Also, why should unemployment be taxed at all.

This started in 1987 under Reagan. For 50 years benefits were not taxed. But in order to fund tax cuts to for investment income he decided to tax unemployment benefits.

I won't dispute the actual rate. It will of course vary. I will dispute the fairness of such a tax, at any rate.

[former9thward]

40. No actually "he" didn't.

Democrats controlled the Congress and legislation was passed and sent to Reagan. Both parties are responsible.

[Progressive dog]

51. Reagan's party had the Senate which is part of the Congress

[former9thward]

57. Yes but the Democrats had the House.

The House is where all revenue legislation originates under the Constitution. Democrats had huge majorities during that time period. Nothing that Tip O'Neill did not want was going to get through the House.

[Progressive dog]

62. Totally Historically Untrue

Seven of eight Reagan budgets were rejected by the house.The Senate then can amend the bill (could be completely different) in any way it chooses. Then a conference committee reconciles these bills. The final bill can be vetoed by the President.
Now, assuming that the Republicans in 1986 were more willing to compromise than they are now, they still could write a bill in the Senate through "amendments".

You must assume that the Democrats were willing to shut down the government to win against Reagan and his Senate allies.
Sorry, that would be the Reagan Republicans.
We can argue about exact levels of responsibility, but it is obvious that the party of the 1% is the instigator and beneficiary of these tax changes.

[geckosfeet]

55. UNDER Reagan. Dems AND repubs must have passed it for him to sign.

They also passed a huge tax break for investment income.

[jody]

46. Please answer #45. nt

[Spoonman]

67. Try being an educator,

and not an ass.

Your posts are purely confrontational and meant to demean those whom you are replying to.

[jody]

68. "Try being an educator"! LOL You should try being a student. nt

[slackmaster]

12. I can't bring myself to feel sorry for someone who makes enough money to pay 30% on UI benefits

Tax brackets for 2012:

Tax Bracket Married Filing Jointly Single

10% Bracket $0 – $17,400 $0 – $8,700
15% Bracket $17,400 – $70,700 $8,700 – $35,350
25% Bracket $70,700 – $142,700 $35,350 – $85,650
28% Bracket $142,700 – $217,450 $85,650 – $178,650
33% Bracket $217,450 – $388,350 $178,650 – $388,350
35% Bracket Over $388,350 Over $388,350

[Progressive dog]

20. I can't either but

A 10% tax when you don't have enough to live on or a 15% tax when you might barely be able to get by seems unfair compared to the 15% tax on the incomes of the very wealthy.

[geckosfeet]

24. Ok. 15% is bad enough for unemployement benefits.

I can feel sorry for people raking in $17k paying 15%.

[slackmaster]

38. UI benefits shouldn't be taxed at all. Other kinds of insurance settlements are not taxable.

[former9thward]

41. People making 17K are not taxed at 15%

You are forgetting the personal exemptions and standard deduction. If you make 17k a year it is very likely you are paying no income taxes whatsoever.

[geckosfeet]

54. Ok. 17k taxable income after your deductions.

Sheesh.

[former9thward]

56. Sheesh.

It is all the difference in the world. Most people who only make 17k pay no income tax at all.

[geckosfeet]

59. Yeah. Those dirty rotten freeloaders.

[former9thward]

60. Your words not mine. Are you part of the 1%?

[geckosfeet]

63. Hardly.

I just think unemployment benefits below some reasonable annual amount (say $60k) should not be taxed at all.

[former9thward]

64. I agree with you.

But as a practical matter unemployment is taxed very little. The average unemployment check is about $300. If you were on unemployment the entire year you would make about $15,000. Even if you were at the highest taxable type (single, no dependents) you would have about $9500 in exemptions and the standard deduction. So you would be taxed on about $5,500. At that rate you are in the 10% bracket so your tax would be about $550 or an effective tax rate of 3.6%. That is assuming you had no other deductions or tax credits.

[geckosfeet]

65. $550 for someone with no job and $15k in benefits is a lot.

$550 pays for stationary, envelopes, printer supplies, resume and mailing services. Maybe even interview related travel for the year.

Those are practical considerations for someone making $15k a year.

[former9thward]

66. It is not a lot for a single person with no dependents.

I used that example because that is the highest rate. If they were married or had dependents there would be no taxes whatsoever.

[geckosfeet]

69. As it should be.

[jody]

45. If on their Form 1040, line 43 for Taxable Income, person A has $20k in earned income and person B

has $20k in unemployment income, and all subsequent entries on the form are the same, then they both pay the same taxes.

Do you believe the unemployed person should pay less tax than the person who worked?

[geckosfeet]

53. Yes. Likely they are living on about half the income they had before losing their job.

I also believe that investment income should be taxed at 50%.

Unemployment income should not be taxed at all.

[Matariki]

26. Just a reminder - taxing unemployment benefits was courtesy of Ronald Reagan

the shittiest president ever.

[geckosfeet]

31. Exactly. Used it to fund invetsment income tax breaks.

[dems_rightnow]

33. Not true- it was Carter

They became taxable in 1978. See the 1979 Form 1040, line 20.

http://www.irs.gov/pub/irs-prior/f1040--1979.pdf

[Progressive dog]

42. Raygun made ue benefits taxable per wickopedia

The $2400 exemption was added in 2009. Reagan made ALL unemployment benefits taxable.
Note the "taxable part if any" on the 1979 form.

[former9thward]

43. Untrue.

Congress which was controlled by Democrats passed that legislation not Reagan. He signed it. Both parties are responsible.

[dems_rightnow]

44. Wikipedia is wrong

It's pretty tough to argue with that 1979 tax form, wouldn't you say? Unless you want to contend that they put the line on the Form in anticipation of Reagan becoming president and making them taxable.

Carter made UI benefits 50% taxable. The change to make them 100% taxable came under the Reagan Administration.

[Progressive dog]

49. Wikipedia is not wrong per the Congressional research service

[link:http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1224&context=key_workplace&sei-redir=1&referer=http%3A%2F%2Fwww.google.com%2Furl%3Fsa%3Dt%26rct%3Dj%26q%3Dtaxation%2520of%2520unemployment%2520benefits%26source%3Dweb%26cd%3D1%26ved%3D0CCcQFjAA%26url%3Dhttp%253A%252F%252Fdigitalcommons.ilr.cornell.edu%252Fcgi%252Fviewcontent.cgi%253Farticle%253D1224%2526context%253Dkey_workplace%26ei%3DMEkdT7C4LuTV0QGd__CmCw%26usg%3DAFQjCNGNzh69hsFd8NRzx-CRoUNI4YW1Iw#search=%22taxation%20unemployment%20benefits%22|

In 1979 UE benefits became taxable for AGI's above $20,000 single and $25,000 joint. The taxable amount was the lesser of UE benefits or 1/2 of AGI including UE benefits. In 1982 the AGI threshold was lowered to $12,000 and $14,000. In 1986, under Ronald Reagan---NOT Jimmy Carter--UE benefits became ordinary income for tax purposes.

So-It is obvious that Carter's change protected lower income households and Reagan's did not.

[Matariki]

58. Thanks ProgressiveDog

I *remember* those days and folks I knew in my depressed steel mill town suddenly owed taxes on their unemployment where they hadn't before.

And don't get me started on how many people had to drop out of college because one of the first things Reagan did was cut financial aid . I hate that fucker and hope he gets the ignominious place in history he deserves.