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Here’s some good news for the millions of Americans who need that money ASAP.

Earlier this year, Americans were thrown a lifeline in the midst of a pandemic that ultimately spurred a recession unlike any other: a round of direct stimulus payments. Under the CARES Act, those payments maxed out at $1,200 per adult and $500 per child under age 17, and they helped countless households keep up with their bills in the face of job loss and economic uncertainty.

Meanwhile, lawmakers spent the better part of the summer duking it out over a second stimulus bill, and the expectation was that they’d come to an agreement to facilitate a follow-up round of direct payments by September at the latest. But lo and behold, we’re already in mid-September, and no such deal has been signed. Which means stimulus payments are deadlocked as well.

As if that weren’t enough to make Americans give up on ever getting a second check, Republicans presented a pared-down bill last week that did not include a stimulus payment. That proposal failed to advance in the Senate, and dealt the public yet another harsh blow.

But a new development on COVID-19 relief lends a little optimism that another round of stimulus payments just might be in the cards after all. And that’s something that desperate Americans will really be pulling for.

Will there (finally) be another stimulus check?

On Sept. 15, the bipartisan Problem Solvers Caucus (consisting of 25 Democrats and 25 Republicans) introduced a proposal designed to provide the COVID-19 relief the public desperately needs. The proposal addresses a number of key points, including boosted unemployment benefits; state and local aid; and assistance for small businesses, many of which have struggled immensely during the pandemic and now risk closing permanently.

But one encouraging aspect of this proposal is the inclusion of not just one check, but potentially two rounds of direct stimulus checks. Specifically, eligible recipients would initially be in line for a $1,200 payment per adult, and a $500 payment per child or dependent adult. And the proposal also calls for another round of automatic stimulus checks in March 2021 if economic circumstances warrant it. Given that unemployment has been extraordinarily high since April, and that the jobless rate could stay that way or worsen over the next six months, that’s a very good thing.

Will this new proposal actually pass?

While this new proposal is bipartisan in nature, lawmakers might still argue over its cost. With a $1.5 trillion price tag, Democrats might still insist that more money needs to spent in the course of dishing out aid. Meanwhile, Republicans might argue that the cost is too high, especially given their recent slimmed-down bill.

While the new proposal is certainly meant to appease both sides, ultimately there’s no guarantee that it will become law. The fact that it calls for a second stimulus round, however, is still something for the public to hang its hopes on.

Author: Maurie Backman

Source: Fool: A Second Stimulus Check May Be in the Cards After All

With relief bill negotiations stalled, there’s a good chance Americans will need to wait even longer to get a second direct payment.

The COVID-19 outbreak has caused a financial crisis unlike any other Americans have experienced. Not only is the economy stuck in a recession, but the unemployment rate, as of July, is still in double-digit territory.

It’s not just the jobless who are having a hard time making ends meet. Many households are struggling with income losses and added expenses, like having to pay for child care due to limited in-person learning at school. Many are desperate to get their hands on a second stimulus check.

Initially, it seemed as if lawmakers were on board with the idea of a second direct payment. It seemed likely that recipients would receive that extra cash at some point in September. But now, that money may not come until October — if it arrives at all.

What’s holding up those stimulus checks?

The initial stimulus payments that went out earlier in the year were authorized by the Coronavirus Aid, Relief, and Economic Security Act signed into law in late March. For a second round of payments to go out, lawmakers will need to agree on a second relief bill.

Right now, stimulus negotiations are deadlocked. Lawmakers are still struggling to agree on a number of key sticking points for that second deal, including boosting unemployment. Meanwhile, Senate Republicans recently released a new bill that’s being dubbed a “skinny” relief package. The “skinny” stems from the fact that it omits a number of relief measures, including the second stimulus payment that lawmakers actually seemed to agree on from the start.

Americans won’t necessarily get stuck with this stingy, stripped-down version. But it’s likely that they will get stuck waiting until October for their stimulus payments. The Senate is currently on recess until Sept. 8. There’s a chance that lawmakers will get called back to the Senate early, but that’ll only happen if both sides manage to come to an agreement on a stimulus deal before then, which doesn’t seem likely. Even if a stimulus payment makes it into the final bill, lawmakers will only first reconvene to talk about it in September, which means by the time the details are sorted out, it could take until October at the earliest to get that money into the hands of those who need it.

That’s very bad news for the millions of jobless Americans who have not been privy to boosted unemployment benefits since late July. It’s also bad news for those teetering on the edge of debt already.

Will there be a second stimulus check at all?

There’s a good chance a second direct payment will make it into the final relief package lawmakers pass for one good reason: The economy actually does need to be stimulated. If Americans don’t get that money, it could result in additional small business closures and other undesirable consequences that only prolong everyone’s misery.

Lawmakers seemed intent on a second stimulus check earlier in the year, and there’s really no reason for them to walk back that thinking. Americans shouldn’t give up on a second stimulus check altogether; they may just need to give up on getting one next month.

Author: Maurie Backman

Source: Fool: Your Second Stimulus Check May Not Come Till October

The rules surrounding Social Security may be changing — for better and for worse.

Social Security serves as a critical income source for millions of seniors, but the program is in trouble. In the coming years, it expects to owe more money in benefits than it collects in revenue, largely due to an anticipated mass exodus of baby boomers from the workforce.

Social Security can tap its trust funds to make up for a near-term revenue shortfall, but once those funds run out of money, benefit cuts will be on the table. And that could be catastrophic for the millions of retirees who rely on those benefits today, as well as future retirees who can’t afford that hit.

As such, lawmakers are proposing changes to Social Security to help avoid a widespread reduction in benefits. Here are a few ways the program’s rules might evolve in the coming years to sure up its finances.

1. A shift in full retirement age

Social Security benefits are based on seniors’ lifetime earnings, and recipients can collect their full monthly benefit once they reach full retirement age, or FRA. Right now, FRA is either 66, 67, or somewhere in between, but some lawmakers are proposing that it be shifted to a later age — somewhere between 68 and 70. Doing so could result in major savings for Social Security, and since life expectancies have been increasing, proponents of this idea argue that it’s a reasonable course of action to take.

2. A higher wage cap — or no wage cap at all

Higher earners don’t pay Social Security taxes on all of their earnings. There’s a wage cap that limits the amount of income that’s subject to Social Security taxes each year. Right now, the wage cap stands at $137,700, and while it may increase modestly in 2021, it’s unlikely to go up by more than a few thousand dollars. By contrast, there are plenty of people whose earnings well exceed $137,700 who get out of paying taxes on a large chunk of their income.

In an effort to save Social Security from insolvency, some lawmakers are proposing a much higher wage cap than $137,700, while others are calling for no wage cap at all. Either idea would of course anger the wealthy, but it would also serve the very important purpose of pumping money into Social Security to prevent benefit cuts.

3. A means test to determine eligibility

Right now, anyone who earns enough work credits during his or her career is entitled to Social Security benefits. This means that someone with an annual retirement income of $5 million can still collect Social Security, even if that money is virtually meaningless.

As such, some lawmakers have suggested implementing a means test for Social Security eligibility. With a system like this, higher earners would receive a reduced Social Security benefit or even none at all, while lower-income seniors would be able to collect more. Ultimately, the goal would be to put Social Security income into the hands of those who need it the most, all the while reaping savings by virtue of not having to pay higher earners.

Will these changes actually happen?

Right now, all of the above changes are ideas — not givens — and each one comes with its own drawbacks. Raising FRA, for example, will effectively cause beneficiaries to lose money. A higher wage cap will put some earners at a disadvantage — namely, those who aren’t exceptionally wealthy, but rather, earn a salary that’s needed in certain areas of the country to keep up with a notably high cost of living (a $160,000 salary in New York City, for example, does not make a person wealthy). And means testing creates a scenario where seniors are punished for saving diligently and investing wisely to amass wealth after having spent years paying into a program they thought they’d be entitled to. Therefore, while it’s certainly worth keeping an eye out for these changes, it’s too soon to bank on them actually happening.

Author: Maurie Backman

Source: Fool: 3 Potential Social Security Changes to Watch

Another downturn may be coming, and it could be worse than what we saw in March.

When U.S. cases of COVID-19 started multiplying back in March, the economy pretty much imploded overnight, and by late March, stocks plunged into bear market territory for the first time in over a decade. Since then, things have picked up in the stock market, and despite a recent patch of volatility, stocks have largely recovered their value. But the worst may not be over.

Over the past few weeks, reports of COVID-19 surges have rocked the market once again. Throw in the fact that the jobless rate is still high and there’s no official word on a second stimulus package, and it’s easy to see why investor confidence could seriously waver in the coming weeks or months. In fact, it’s fair to say that we may see another stock market crash that mimics the dramatic dip we saw in March. And given that possibility, it’s crucial that we all take steps to prepare for it. Here are three ways to do it:

IMAGE SOURCE: GETTY IMAGES.

1. Have a stockpile of emergency cash

It’s extremely disheartening, and in some cases downright terrifying, to look at your portfolio balance and observe a major drop from a recent high. But remember: You only lose money in the stock market if you liquidate investments while they’re down. If you put yourself in a position to leave your portfolio alone for months or even years at a time during periods of volatility, you don’t stand to lose any money at all.

That’s why having a solid emergency fund is crucial, especially during periods of economic uncertainty. Right now, we’re in a recession, and while stocks have somehow managed to thrive in spite of it, a crash may be imminent. If you lose your job at a point when the market is down, you might have to sell off investments at a lower price than what you paid for them to ensure that you’re able to keep paying your bills. But if you have a good six months’ worth of essential living expenses tucked away in the bank, you may not have to touch your investments at all.

2. Make sure your portfolio is diversified

Back in March, most market segments were impacted by the COVID-19-induced crash. But if there’s a second crash, some industries may get hit harder than others. That’s why a well-diversified portfolio is important, and now’s the time to make sure that’s what you’re looking at.

Review your stocks and make sure they represent a broad range of companies in different industries. And if you see an unhealthy mix (say, you have more auto stocks than you’d like), now may be the time to do some rebalancing, before stock values sink further. Also, adding some dividend stocks to your portfolio may be a good idea if you don’t have many. That added income could help offset potential losses in the event of a crash.

3. Have separate cash at the ready to invest

Though stock market downturns are scary, they do offer a solid opportunity to load up on discounted investments: stocks that may otherwise be out of your price range. While you shouldn’t dip into your emergency fund to buy stocks, you should make every effort to set aside extra cash so that if stock values plummet, you have a chance to buy up some companies you’ve been looking at.

A stock market crash can be an investor’s worst nightmare, but it actually doesn’t have to be. If you go in prepared, you’re more likely to make it through a downturn unscathed. It’s too soon to tell what the rest of 2020 has in store for the stock market, but given that the COVID-19 pandemic is by no means under control, we may all have to gear up for what could be a very bumpy ride.

Author: Maurie Backman

Source: Fool: How to Prepare for a Second Stock Market Crash in 2020

Worried you won’t have enough money during your senior years? Here are some solutions worth pursuing.

Planning for retirement means taking steps to ensure that you’ll have enough money to cover your living expenses when you’re older. Now there are some income sources you probably know you can count on in retirement. First, there’s Social Security. Though there’s talk of benefits being cut in the future, the program is by no means in danger of completely going bankrupt, and so you should be set to receive some amount of income in your monthly benefit.

Next, there’s your 401(k) or IRA. Though you’ll need to manage your withdrawals carefully to ensure that you don’t deplete your retirement savings prematurely, if you manage to amass a decent sum of money, you’ll have some income to look forward to as a senior.

IMAGE SOURCE: GETTY IMAGES.

But Social Security and personal savings aside, you may actually have a number of surprising income sources at your disposal during retirement. Here are a few that could make your senior years more comfortable.

1. Your home

Not everyone owns a home in retirement, but if you do, you have a number of income-generating options. First, you can always downsize to a smaller space and use the proceeds from the sale of your original home as income as needed. If you’d rather stay in your home, you can look into renting it out, whether on a partial or long-term basis. Granted, you may need to check your city’s zoning laws to make sure you’re allowed to offer up your space as a rental, but if you get the green light, you can look at getting a tenant, especially if your home has a finished basement, garage, or other separate area that’s conducive to this type of setup.

2. Your car

You may think of your vehicle as a necessary expense, but if it’s in good shape and you’re the type who doesn’t mind driving, you can use it to generate extra income during retirement. Ridesharing services have become extremely popular, and if you live in a city where there’s lots of demand, you could supplement your retirement income quite nicely by driving people from place to place. And at that stage of life, you may find that you enjoy the social aspect of meeting new customers, and that having that gig helps you avoid excessive boredom that could lead to mental health issues.

3. A business you run yourself

It’s not uncommon for seniors to hold down a part-time job during retirement, but after a lifetime of hard work, you may not want to have yet another boss to answer to or a rigid schedule to maintain. That’s why starting your own business could be a better solution. That way, you get to call the shots and decide how much time you want to sink into that venture. Best of all, the money you earn from that business is yours to keep in full, minus taxes and expenses. The more you hustle, the more extra retirement income you get to enjoy.

Many seniors worry about living on a fixed income during retirement. If you share that concern, it pays to explore the ways you can supplement your Social Security benefits and 401(k) or IRA withdrawals. You may find that you have more options at your disposal than you initially imagined.

Author: Maurie Backman

Source: Fool: 3 Unexpected Sources of Retirement Income

Millions of Americans are desperate for financial relief right now. Could claiming Social Security well ahead of retirement age be the solution?

Millions of Americans are struggling due to the COVID-19 crisis, and while there’s already been some degree of relief — namely, boosted unemployment benefits, forgivable small business loans, and the stimulus payments that have been going out since April — a lot of people are still desperate for money. Those in need of cash have several options at their disposal. They can borrow against their homes, apply for personal loans, or even raid their retirement plans early without the penalties that normally apply for doing so. But desperate Americans may have another cash source to tap — Social Security.

The Trump administration is reportedly considering the idea of prepaying Social Security benefits to workers before they’re eligible to file. Normally, the earliest age to sign up for Social Security is 62, and claiming benefits at that age results in an automatic reduction in those monthly payments. Generally, that reduction is lifelong, though it’s possible for seniors to undo their filings and avoid that fate.

IMAGE SOURCE: GETTY IMAGES.

Due to the ongoing crisis, the Trump administration is supposedly considering the idea of letting Americans collect up to $5,000 in Social Security immediately. The catch? They delay that money later in life. Specifically, the $5,000 would be set up as a loan with a government-set interest rate that would reimburse Social Security’s trust funds. Workers who take their $5,000 in Social Security well ahead of schedule would forgo their first three months of benefits later in life in exchange.

A viable solution, or terrible idea?

Those in favor of letting workers access Social Security early say that it’s a good solution for those who need money but don’t have personal savings to tap (retirement or otherwise), don’t own homes, and don’t have the credit scores needed to qualify for a personal loan. The problem, however, is that Social Security’s purpose is to serve as a means of poverty protection for seniors who no longer have a paycheck from work to collect. By accessing that money today, workers would risk falling on hard financial times during their later years, when they’re even more vulnerable.

Supposedly, the aforementioned proposal could be structured so as to not hurt Social Security financially, and that’s a good thing given that the program was already facing its share of fiscal woes before COVID-19 took hold. But given the dangers associated with letting workers take an advance on their Social Security income, this is one proposal that may be unlikely to get put into practice. A better solution to the current crisis may instead come in the form of a follow-up stimulus check — something many lawmakers have been calling for since the first round of payments went out. So far, a second stimulus has not been approved, but if the COVID-19 crisis drags on for the remainder of the year and continues to batter the economy, something will need to be done to help Americans stay afloat.

Author: Maurie Backman

Source: Fool: President Trump May Let Workers Take Social Security Early — With a Catch

COVID-19 has already forced millions of Americans out of work and caused countless businesses to close their doors. In response, lawmakers approved a $2 trillion economic stimulus package in late March that, among other things, entitles eligible Americans to a one-time $1,200 payment.

Many people have already seen that stimulus cash hit their bank accounts, while others will have to wait for a check to arrive in the mail. But either way, a large number of Americans agree that a single $1,200 payment won’t be enough to help them through the ongoing crisis. And lawmakers feel similarly. As such, there are already talks of a second stimulus payment. But whether that money actually comes through is yet to be determined.

What’s in store for desperate Americans?

Recognizing that a single $1,200 payment falls short for struggling Americans who are out of work, Democratic lawmakers introduced a bill a couple of weeks back called the Emergency Money for the People Act. The bill seeks to pay Americans aged 16 and over earning less than $130,000 a year $2,000 a month for at least six months, or until unemployment levels fall to pre-COVID-19 thresholds. For married couples, the bill seeks to pay $4,000 a month for those earning less than $260,000. Qualifying families would also be entitled to an extra $500 per child for up to three children per household.

Will more stimulus money come through?

Though a follow-up stimulus payment would be a lifeline for millions of Americans, right now, lawmakers are still debating the merits and specifics of approving one. But the longer the COVID-19 crisis drags on, the greater the need will be for an additional stimulus check.

Rent and mortgage relief may be on the table, too

In addition to the Emergency Money for the People Act, the Rent and Mortgage Cancellation Act is also floating around. As the name implies, it would cancel rent and mortgage payments on Americans’ primary residences for up to a year. Given that housing is the typical American’s largest monthly expense, it would certainly spell relief, especially in the absence of a second round of stimulus checks.

Get help now

It’s too soon to tell whether Americans will get a second stimulus payment, or whether they’ll need to make do with one payment only. But if you’re struggling to pay your bills even with that initial stimulus cash in hand, you shouldn’t hesitate to reach out to your lenders and service providers and ask for relief.

If you’re carrying a mortgage, ask your lender to put your loan into forbearance temporarily. If you’re a renter, explain your situation to your landlord and ask to be cut some slack. If you can’t pay your utility bills, ask your service providers for an extension. And if you owe money on a credit card, talk to your issuer about deferring some payments while you’re out of work or having a hard time making ends meet. A second stimulus payment may or may not be in the cards, but rather than sit back and wait for one, take steps to buy yourself some breathing room right now.

Author: Maurie Backman

Source: Fool: Will There Be Another COVID-19 Stimulus Check?

Sitting on $1,200? Here’s how to put that cash to good use.

COVID-19 has been hurting the U.S. economy since cases started multiplying rapidly in March. Since then, millions of Americans have lost their jobs, while countless businesses have had to close their doors, perhaps for good.

Thankfully, Americans are getting some relief. In late March, the CARES (Coronavirus Aid, Relief, and Economic Security) Act was signed into law, and with it came a host of provisions designed to help people get through this very dark time. Perhaps the most talked-about feature of the CARES Act is its $1,200 stimulus payment — a payment that’s already started hitting Americans’ bank accounts.

Single tax filers with an adjusted gross income of $75,000 or less can receive a $1,200 stimulus payment in full, but past that point, it starts to phase out. Married couples filing jointly will get a full stimulus payment provided their adjusted gross income is $150,000 or less. And there’s an extra $500 on the table per child under the age of 17.

If you’re sitting on your stimulus money, or expect to receive it in the not-so-distant future, it’s imperative that you put it to good use. Here are just some of the things you might do with your stimulus if you don’t need that cash to pay for basics, like food and household supplies.

1. Build or boost an emergency fund

The COVID-19 crisis has already resulted in widespread job loss, and we don’t know if things will get worse before they get better. As such, it’s important to have a healthy savings cushion so that if your job lands on the chopping block, you have a means of paying your bills. Ideally, you should aim to have three to six months’ worth of living expenses tucked away in savings, so if you’re not there yet, use your stimulus to get closer to that goal.

2. Pay off costly debt

If you’re carrying a credit card balance, the sooner you pay it off, the less it will cost you in accrued interest. If you’re good on emergency savings, consider using some of that money to knock out credit card debt. Doing so may, incidentally, help boost your credit score as well.

3. Pad your retirement savings

There’s lucrative tax savings to be reaped when you save for retirement in an IRA or 401(k). If you’re not already maxing out your contributions, think about using your stimulus money to fund your retirement plan. If you invest that $1,200 at an average annual 7% return (a reasonable assumption for a stock-heavy portfolio) and you’re 35 years away from retirement, you’ll ultimately boost your nest egg by nearly $13,000.

4. Buy the right insurance

If you’ve skimped on your life insurance, homeowners insurance, or health insurance in the past, now’s your opportunity to lock in better coverage. You may not be eligible to change your health plan right now, but if that’s the case, hang onto that money so you have more options when your next enrollment window opens. And if you don’t have life insurance in place, prioritize it — especially if you have a spouse and kids.

5. Invest in your career

Being stuck at home means you may have an opportunity to spend more time focusing on your career — so why not invest in the tools needed to further it? Take a class to broaden your horizons, or pay for a course that teaches you a skill you’re lacking. You might even choose to upgrade your laptop so you can work more efficiently.

6. Be charitable

Giving away a $1,200 check is a big ask. But if you don’t need that money, you might consider using some of it to help those less fortunate. Support a charity whose work you admire, or help a local food bank stock up on supplies. Donate a meal to healthcare workers in your area, or give an out-of-work friend a no-interest loan. There are so many ways you can give back, and doing so will give you something to feel good about.

Many Americans need their stimulus cash to pay their immediate bills. If you’re not one of them, be strategic with that money. After all, it’s not every day that $1,200 lands in your lap, and while the circumstances leading up to that payment are, of course, unfortunate, you should still take the opportunity to make the most of that windfall.

Author: Maurie Backman

Source: Fool: 6 Ways to Make the Most of Your COVID-19 Stimulus Check

Eagerly anticipating your stimulus cash? Here’s why you could end up waiting longer.

Ever since COVID-19 took hold in the U.S., it’s been battering the economy and driving millions of Americans into unemployment. To provide relief, lawmakers passed a $2 trillion stimulus package in late March that, among other things, calls for a $1,200 lump sum payment for anyone whose income falls below a certain threshold.

At first, it was unclear as to when Americans would receive their money, and some experts worried it wouldn’t go out until May at the earliest. But actually, millions of people have been issued a stimulus payment already via direct deposit, as they started going out the week of April 13.

But what if you’re still missing your money? If that’s the case, here are a few reasons why your stimulus cash may be taking longer to arrive.

1. You didn’t file a tax return for 2018 or 2019 — or you filed one but didn’t get a refund

If you filed your 2018 or 2019 taxes, were due a refund, and signed up to receive that money via direct deposit, you may already be sitting on your stimulus payment. But if you didn’t file a 2018 or 2019 tax return, or you filed one but weren’t due a refund and therefore didn’t include bank account details, then you’ll need to give the IRS that information so your stimulus payment can be processed quickly. Thankfully, the IRS has launched a new tool that lets you input your bank details and effectively register for your stimulus payment — but don’t delay, or you’ll have to wait on your money even longer.

2. Your money went to an old bank account

The most recent bank account information the IRS has on file will be used to determine where your stimulus payment should land. But if you’ve since closed that account, any stimulus money that gets sent there will be bounced back, thereby delaying your payment. Again, using the above tool to update your bank account details is a smart move — one that could get you your money sooner.

3. You’re still waiting on a physical check

If the IRS doesn’t have bank account details for you on file, and you have no intention of providing direct deposit information, then you’ll need to wait for a physical stimulus check to arrive in your mailbox. And that could take a while. It’s anticipated that physical checks will start getting sent out in early May, but only a certain number will be issued per week. Meanwhile, those paper checks will be prioritized so that low-income households receive them first, and all told, it could take up to 20 weeks to mail all of them out. That means you could be stimulus-free for quite some time if you’re not a particularly low earner.

If your income has been cut by COVID-19, you probably need a stimulus more than ever. If that’s the case, take the time to update the IRS with your banking details so you’re not left scrambling to pay your bills while you wait for that money to arrive.

Author: Maurie Backman

Source: Fool: 3 Reasons Your Stimulus Payment May Be Delayed

Unfortunately, the money you get from unemployment isn’t all yours to keep.

Millions of Americans have lost their paychecks over the past few weeks as the COVID-19 crisis has turned the U.S. economy on its head. Things have gotten so bad that lawmakers pushed through a $2 trillion stimulus package that enhanced unemployment benefits for the millions of filers who are collecting them right now.

Generally, you’re entitled to unemployment benefits if you lost your job through no fault of your own (meaning, you were the victim of downsizing or a closure, and weren’t fired for cause) and also meet your state’s minimum earnings requirement. Your weekly benefit is then calculated based on your state’s rate and your previous earnings.

Thanks to the aforementioned stimulus package, those on unemployment are entitled to an extra $600 a week on top of their standard weekly benefit. Unemployment benefits have also been extended by 13 weeks, and are now available to out-of-work freelancers, too (normally, self-employed workers aren’t eligible).

If you’re collecting unemployment benefits, or expect to be in the very near future, you’ll likely come to regard that money as a financial lifeline. But before you start making plans to spend all of that money on essentials and bills, remember that unemployment benefits are considered income, which means the IRS gets a piece of them.

You can’t avoid taxes on unemployment benefits

Just as you’re required to pay taxes on the income you earn from a job, so too are unemployment benefits taxable. You’ll generally get two choices for paying taxes on that money — you can elect to have 10% of your weekly benefit withheld immediately, or you can make estimated quarterly tax payments to the IRS during the year.

The former is generally a safer bet if you don’t want to end up with a tax headache on your hands next year. By contrast, to make estimated payments, you’ll need to account for your total income, not just those weekly payments, which could get complicated. On the other hand, if you’re truly desperate for cash, not withholding that 10% gives you a little more flexibility for collecting your money — you get your entire weekly benefit up front, and it’s then on you to manage that sum so you’re paying the IRS its share eventually.

Reporting unemployment income on your tax return

If you receive unemployment benefits this year, you’ll receive a 1099 form summarizing that income that the IRS will get a copy of as well. This means you won’t be able to hide your unemployment income, and excluding it from next year’s tax return could land you on the IRS’s audit list.

You’d think unemployment benefits would be yours free and clear of taxes, since the whole reason you’re collecting them stems from being out of a job. But unfortunately, any time you make money, the IRS is entitled to a share of it, and that includes the weekly benefits that may be keeping you afloat right now. Keep that in mind so there are no unpleasant financial surprises down the line.

Author: Maurie Backman

Source: Fool: Collecting Unemployment Benefits? Prepare for This Unpleasant Surprise.

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