With a record number of people filing for unemployment and widened categories, there has been crying, confusion, and crashes. While this is not news or financial advice, As a former tax preparer, I wanted to share my thoughts (i.e. a little bit of context).
The option is given to have 10% withheld from the payments sent to you, for federal income taxes. In states that have their own income tax, there is also the option to withhold for that as well (in New York it is 2.5%). Just like withholdings from a job, this is an attempt to not have to owe more come April 2021. Be warned that even if you elect the withholdings, you still might owe, because taking a flat percentage of money isn’t good tax planning by the state. Or you might get a refund.
So should you have taxes withheld? This depends entirely on personal circumstances but here are my thoughts:
- If you absolutely need all of the money from unemployment,
click no on withholdings. Your health and safety are a now problem, taxes are a next year problem
- Do you always rush to file as soon as you get all of your documents? With unemployment being taxable, people don’t always realize that they might owe, since they are used to getting a refund. So if you’re a sometimes dilly dally with tax filings, person, say yes to withholdings.
- How much money were you making and how much were you having withheld (before your job loss)? Here’s the amount of income for the year (including unemployment) people can make before having to pay any federal income taxes: …. Even if your income so far is below these limits, unemployment withholdings might still be advisable.
Saving for Retirement:
Roth IRAs are a type of retirement account that you don’t need an employer to utilize. After tax dollars are used to fund Roth IRAs, so the money grows and is withdrawn tax free when you retire. Since many people will be in lower tax brackets this year, it might make sense to contribute now to avoid higher taxes later.
Self Employed with dependents:
It is especially important to keep records of income received (and expenses), this year. If your profits are modest (or even a loss that offsets W2 wages), you might end up qualifying for the Earned Income Credit, which can provide huge refunds. Your audit risk is higher because these credits can be easily abused (someone can just say they made x amount of money to get thousands). The other main reason for Earned Income Credit audits is that the benefit stops increasing at three children. Some fraud has taken place where someone would let somebody else claim their additional children (maybe even getting a kickback) for the credit. States like New York are known to ask people for proof that you actually took care of those children.
A blog post can not be tax advice, but these are some things that are worth researching in Twenty twenty.
Editors Note: On the third Tuesday of each month, I plan to release a post about a financial topic. Look forward to our thoughts on how sex and dating could change if quarteen impacts the choices of where to enroll for college.