OMG They tax that too!

Heads up if you’ve recently begun collecting unemployment benefits for the first time.

That money is taxable, same as the paycheck you are no longer getting. But Missouri, Kansas and most other states won’t withhold tax money from your unemployment check, the way your former employer did , unless you specifically ask them to. So start planning now, while there is still time in 2008, to arrange any extra tax deductions or other changes you need to avoid a nasty surprise April 15.

“Most people don’t ask for the withholding, because their check isn’t big enough to pay the bills anyway,” said Ken Baylie, co-owner of the Tax Gallery in Kansas City.
You’ve got three ways to head off a filing time jolt, but none of them is perfect.

The simplest is to simply set aside between 15 percent and 20 percent of each check to cover the tax bite in April. Stashing the money in a money market account or some other short term account that pays interest may even earn you a few extra dollars. But stashing the money is not an option if you need it for rent, house payments or food.

Or you can ask the state to withhold the money for you. The fastest way to find out how is to follow a U.S. Labor Department link to the state issuing your check and then use the state instruction and forms to make the change. The problem here is that states withhold only the 10 percent of each check that covers your federal taxes, but not additional state taxes you may owe.

Your third choice, especially if you think you may be unemployed for some time, is to consider paying quarterly estimated taxes on your unemployment benefits. Those are due each January 15, April 15, July 15 and October 15. This Bankrate.com link or your regular tax professional can walk you through the extra paper work. Filing taxes four times a year instead of once isn’t fun, but this may be the most effective way to go, especially if you think you may collect unemployment for a full 26 weeks, or longer if you qualify for extended benefits.

Check out IRS's Tax Tips section start tracking down details as far as you want to go.