Just a reminder that if you have received unemployment income this year due to job loss from the pandemic or other reason, this is not “free money.”

You will owe federal taxes on this income and most states do tax this income as well. (CA does not)

Here are a couple tips for you to consider: 

Either use a tax estimation tool like Turbo Tax or speak to your tax professional and get an estimate of what you’ll owe next year in taxes. 

Once you have an estimate of the taxes you will owe, break up that amount by the number of months left before the end of the year, (3), or at least by April 15, 2021 which will give you 6 months, and put aside a portion of your monthly unemployment benefit to prepare for this tax payment which will be due by April 15th, 2021. 

If you absolutely cannot live on less than the full value of your unemployment check and you now know you’ll owe more in taxes than you can pay, be prepared to work out a payment plan with the IRS. You will owe interest if you enter a payment plan, but as long as you pay the minimum on what you owe, you will not have your paycheck garnished once you do get back on your feet and get another job. 

The amount that can be garnished by the IRS from your paycheck is up to 25% of your disposable earnings (what's left after mandatory deductions) or the amount by which your weekly wages exceed 30 times the minimum wage, whichever is lower. (Source: https://www.dol.gov/agencies/whd/fact-sheets/30-cppa)

IRS payment plans are generally much lower than 25% of earnings after required deductions. 

If you are one of the lucky ones making more than you made while working, consider the following: 

-After setting aside the proper amount for taxes, consider building up a cash emergency fund that’s not easily accessible.

-If you have other hight interest debts like credit card debt, you could consider paying down your credit cards which will put you in a better position post-pandemic when the unemployment payments eventually end. 

-Try to avoid treating this additional income like Lottery earnings and buying unnecessary items like new TV’s or a new iPhone. 

I know these are tough times for many. Hopefully these tips will put you in a better financial position to recover as we open back up the economy.