[Hoot Gibson]

Your unemployment insurance benefits are taxable. Any unemployment benefits you receive including benefits paid under any regular state program, extended benefit program, trade readjustment allowance benefits and disaster unemployment assistance benefits must be reported as part of your gross income on your federal and state income tax returns.

You can have taxes withheld
If you wish, you may choose to have federal and/or state taxes withheld from your unemployment benefit payments as you receive them. You may request to have federal and/or state taxes withheld from your weekly benefit check and forwarded by DUA to the IRS and the DOR automatically.

The federal tax withheld would be 10 percent of your weekly benefit payment rate. The state tax withheld would be 5.3 percent. The following January DUA will mail to you, for filing purposes, a statement 1099-G showing total benefits paid and taxes withheld during the previous calendar year.

A typical example:

Unemployment insurance benefit rate = $325.00
Dependency allowance = 50.00 (two children)
Federal tax withheld = -37.00
State tax withheld = -19.00
Net weekly unemployment benefit payment rate = $319.00

http://www.mass.gov/?pageID=elwdterminal...s&csid=Elw

Using your example (assuming a married man, filing jointly with a non-working spouse), the filer would be entitled to a refund of $8,760. In other words, the refund would exceed the taxes withheld by $6,836 and the filer would not be a net federal income taxpayer because his benefits (his refund) would far exceed the taxes that were withheld from his paychecks.

This calculation does not even take into account the fact that a portion of the unemployment compensation that the filer received was most likely funded by the federal government.