CA PFL taxable

It looks like California PFL (paid family leave) is taxable by the IRS when the EDD pays the amounts -- through the SDI tax. But when the PFL is paid through a voluntary VDI plan, is it taxable by the IRS? I imagine no because you don't get to deduct the VDI contributions.

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removeps-groups
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There was an IRS Chief Counsel Memorandum published in 2006 that says that these payments are in the nature of unemployment compensation and are therefore taxable income. I don't know if this memorandum was ever modified or repealed as I left CA a few years ago. Under current law, you add those payments to any other unemployment compensation received, subtract $2400 and enter the balance as taxable income. In addition, the memo also said that if you have not been deducting your SDI (SDI includes a component for the family leave benefit) payments as an itemized state income tax deduction, those payments create a cost basis. In this instance, you would first deduct any contributions you made for the family leave disability insurance component before using the preceding formula to calculate your taxable unemployment compensation.

If you are not contributing via SDI but have a VDI plan and you make those payments after-tax, there is no itemized tax deduction as you are not paying a state income tax to CA. The benefits paid out as "disability" are not taxable in the same manner that any other disability benefit funded by the taxpayer with after-tax payments is not taxable. However, as the family leave benefit is an unemployment compensation payment and not a disability payment, one would have to look to the rules for how private unemployment comp is taxed. Those rules say that any amount you receive that is in excess of the insurance payments you contributed are taxable as other income (Line 21). I draw this conclusion based on the fact that the component of CA SDI that represents the paid family leave insurance is mandatory under the State Unemployment Insurance Code.

Reply to
Alan

Is the $2400 subtraction from unemployment available in tax year 2010 as well? I thought it was a one time thing for 2009.

When you say "create a cost basis", do you mean SDI contributions from the time you've been working? If I'm in AMT for the last 3 years, then my SDI contributions over these 3 years are a cost basis? In this case my taxable income is the PFL amount - accumulated SDI contributions - 2400. That could easily be a negative number, because one might take only one month of PFL.

And you don't get to subtract the $2400?

Reply to
removeps-groups

Yes it expired at 12/31/09.

No. I mean the component of SDI that represents the premium for FTDI. If you never deducted the SDI on Schedule A or obtained a tax benefit for the FDTI premium), then the amount you paid for FTDI (I think this started in 2004 or 2005) forms the cost basis. It is not the amount paid for SDI.

Assuming the Congress extends that exemption to 2010, then you don't get to exempt $2400. That's why the IRS website says to treat it as Other Income and not unemployment compensation.

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Reply to
Alan

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