Tuesday, February 02, 2010

California Paid Family Leave and the IRS

A few years ago, the IRS ruled that California paid Family Leave was taxable. They reasoned that it was some form of unemployment compensation, and thus should be taxed.
For the 2009 tax year, the first $2400 of unemployment compensation is tax free. Does this mean that the first $2400 of paid family leave is also tax free?
Haha! That would be wishful thinking. Nice loopholes only apply in the land of the big bucks. I'm sure there will be a nifty IRS ruling saying something like "well, the law exempting the first $2400 was strictly written, and since this is not real unemployment compensation, it doesn't count."
This is somewhat similar to the logic differentiating State Disability Insurance (SDI) from Voluntary Disability Insurance (VDI). The state administers SDI and requires everyone to pay. However, some employers use VDI instead. The benefits of VDI must be equal to SDI and both must take in enough revenue to cover expenses. The main difference is that VDI is locally administrated, and thus can be better correlated with the employer's system.
Oh, and you can deduct SDI from your taxes.
Even though both are substantially identical, VDI cannot be deducted from your federal taxes, while SDI can.

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