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"Why Are Unemployment Benefits Taxed?" And Other Burning Questions From A New Recipient

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The first thing you do when you have just been laid-off from your job is call the local Unemployment Insurance office. In my case, Massachusetts's. I was fortunate. I called immediately, had an adept and kind person on the other end of the line, and had everything up and running after a measly 20 minute hold time and 15 minutes speaking with the representative. Of course, not everyone in my laid-off cohort was so lucky.

Once in the system, however, a lot of us found that we had a few questions. A few big, complicated questions.

First question: Why are unemployment benefits taxed? I understand that they are income, but
this seems to add in a number of administrative costs. Would it not be cheaper and more efficient to pay slightly lower benefits, but do so tax-free? I can think of one argument that might begin to explain it, but still, upon learning that we were being taxed, my colleagues and I were incredulous.

Second question: How are people in states less generous than Massachusetts making ends meet? The standard (read: lower) benefits rate in Massachusetts is roughly twice that of Washington D.C., yet the cost of living in Boston is not double D.C.'s. Rent or a mortgage payment alone can account for an entire month's benefits, and the din of articles proclaiming that, prior to the recession, Americans were on average spending more than they saved, leads me to believe that most people lack a sufficient cushion.

One last question: Why add hurdles to re-starting unemployment benefit payments after temporary employment ends? Last month I worked as a contract attorney for two weeks and, during those weeks, I earned enough money to not qualify for benefits. Perfectly reasonable. No problem. After the assignment ended, I signed in online to make a claim and was told to call the center to reopen my claim.

Once again, seemingly reasonable. Two hours of hold time later (I was disconnected after holding 50 minutes and called a second time), I am first told that it will take weeks to reopen my claim and only after a lively discussion was I able to reestablish benefit payments. For the first time, I understood why people say that benefits discourage working. The payments, on their own, are not high enough to do so, but fear of losing benefits for a mere few weeks of pay certainly could.

In addition to the abundance of questions, timing is everything. My group happened to be laid off at a time when the difference between calling the week of the layoff and a week or two later appears to be the difference between being included in some extensions and not.

For example, because I called immediately, I met the deadline. This means that I have been able to obtain an extension from the state, not federally, so I was not subjected to the whims of Congress earlier this summer and have consistently been able to collect. However, one of my coworkers called a week later, received a federal extension, and was disconnected after holding three times when she tried to file for retroactive payments. Yet another coworker called two weeks later, was told that she lost her extended benefits entirely, but was actually eligible for them and spent several days trying to prove it.

Clearly, even lawyers struggle with the unemployment insurance system, and we are, quite likely, primarily responsible for engineering it. Even those of us who had initially smooth interactions have, at one point or another, been completely at a loss for what to do next.