In this training video, Dr. Nitin Chhoda explains “How to Avoid a Huge Tax Bill & Penalties with Unemployment Benefits | 3 Things NO ONE is Telling You”
1. Unemployment benefits (and $600/week federal booster) are taxed as ordinary income
2. What is ordinary income
3. THREE ways to offset a huge tax bill / penalties & interest
How to offset a huge tax bill / penalties and interest next year may be the least of your problems right now, and if after you watch this video, you say “Forget the withholding. Let’s put food on the table and keep the lights on. We’ll worry about taxes when the economy recovers” I completely understand and I would do the same. However, it’s important to not only think in the here and now, it’s also important to plan for the future. Also, many subscribers have asked for this!
If you are unemployed / lost your job, and you are receiving unemployment benefits, you could see a tax bill next year (in 2021). Many unemployed workers have no idea the benefit payments they receive in 2020 are taxed. So even those who sustain a significant drop in total income due to a job loss this year could still wind up with a tax bill next year.
Ordinary income refers to income that is taxed according to the regular U.S. tax brackets and includes many types of income. … This includes wages, salaries, tips, and commissions, but EXCLUDES long-term capital gains and qualified dividends, both of which are taxed at more favorable rates
Your unemployment benefit income is taxed as ordinary income by the Federal government. It is considered taxable income by the federal government just like wages
If you don’t pay enough taxes, you may have to pay penalties and interest. If you are getting unemployment benefits, the THREE things you should consider right now are:
1. Ask to have 10% of your unemployment benefits withheld in order to cover your federal income taxes
2. Pay the IRS quarterly taxes (more appropriate for the self employed)
3. Set aside 10% of your unemployment benefits in a savings account. This will allow you to save enough money that you can use towards your federal income tax in 2021. This also gives you a cushion during the rest of 2020, so you can pay your bills and hopefully have an emergency fund. You’ll need the money when your tax bill is due in April 2021.