Down and out, jobless find their benefits taxed as well

WASHINGTON — WASHINGTON -- For the Kellys of Stratford, N.J., 1991 was a rotten year.

Ed Kelly, 59, lost his job as an electrician at the University of Pennsylvania in February. That same month, his wife, Barbara, 58, lost her secretarial position in the wake of a corporate buyout.


The Kellys, who together had earned $50,000 a year, began collecting unemployment benefits: $18,000 last year.

This winter, the Kellys learned an awful truth: The federal government wants $1,909 back.


"We didn't honestly know that it was taxable," Mr. Kelly said. "No one told us."

As April 15 approaches, millions of jobless Americans are finding that what the government giveth, the government taketh away.

Having to pay the tax man when you're down and out is a rude shock. It is especially shocking to the roughly 1.6 million people who lost their jobs last year and are just learning unemployment benefits are taxable -- and there is no withholding.

"It's a kick when you're down, can't pay your mortgage and the IRS wants two thousand bucks," said John Dodds, who works with Kelly at the Philadelphia Unemployment Project, a grass-roots group trying to help the jobless.

The idea of the government tithing the unemployed comes from the Tax Reform Act of 1986. This is the same law that created at least $10.6 billion in special tax breaks for the wealthy and for corporations, congressional records show.

Just how much money the unemployed must give back to the Internal Revenue Service is "tough to determine," said Henry Holmes, an IRS spokesman in Washington. In part, that is because no reliable statistics exist on how many people are out of work, what benefits they receive or what they owe the IRS.

Mr. Holmes said it also is hard to assess the economic and emotional toll of taxing the unemployed. "There's no indication that this caused anybody any more heartburn than any other provision of the tax code," he said.

People who discover they owe taxes they cannot pay should alert the IRS and try to work out a payment schedule to avoid penalties, Mr. Holmes said.


Congress, well aware of the policy it passed and its potential for causing pain, is now considering ways to lessen the hurt.

"Thousands of my constituents have been hit with a triple whammy: They have lost their jobs; they have seen their incomes drop because unemployment compensation is inadequate; and they find that they have to pay taxes on unemployment compensation," Rep. Barbara B. Kennelly, D-Conn., said Thursday at a hearing of a House Ways and Means subcommittee.

She has introduced legislation to eliminate the federal tax on unemployment benefits, but only on benefits received after Dec. 31, 1991 -- too late to do any good this year.