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Collecting unemployment? Here’s How It Will Impact Your Taxes

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Are you collecting unemployment? As of June 2020, the unemployment rate in America was at an estimated 13.3%. That’s down from 16% and those numbers don’t even reflect the scale of how many have had their income cut or lost their job due to the COVID-19 virus.

We’ve just passed the July 15 extended tax filing deadline. With that behind us, it’s time to focus on the 2020 tax season. Being already July, that means that the tax season is half over already. Time flies when you’re fighting a pandemic.

One of the biggest issues in the 2020 tax season will be the massive number of people that were on unemployment for several months during 2020. The number of people on unemployment broke records this year.

For many, that means that they’ll have to pay taxes off their unemployment income. We’ll break down how, why, who, and what you’ll need to know about paying taxes on unemployment so you aren’t surprised come April 2021.

What options do I have to avoid a large federal tax bill next year?

You have a couple different options to avoid a large tax bill for the 2020 fiscal year. We’ll break them down for you.

Automatically Withheld  

This is the easiest option for many. When you sign up for unemployment benefits, you’ll likely have the option to get taxes withheld.

If not, you can fill out a Form W-4V, which will ensure you’re being properly taxed on your unemployment benefits.

Estimated Quarterly Payments  

Freelancers and sole proprietors always have the option to pay taxes quarterly so they aren’t hit with a massive tax bill come April. You can do the same thing with unemployment benefits.

The catch is, you need to estimate how much you owe on your own using a IRS Form 1040-ES. If you underpay these quarterly taxes, you may be penalized. While a massive tax bill in April may seem daunting, consider if you need the money you would pay on quarterly taxes would be better used for rent, food, etc. It’s not worth not being able to afford housing, utilities, etc just to ease your tax burden next year.

Who doesn’t have to pay state taxes on unemployment?

There are a handful of states where unemployment income is not considered income. Here are the states that directly wave unemployment for state taxes:

  • California

  • Montana

  • New Jersey

  • Pennsylvania

  • Virginia

Then, there are nine states without a broad income tax that don’t tax jobless benefits. They are:

  • Alaska

  • Florida

  • Nevada

  • New Hampshire

  • South Dakota

  • Tennessee

  • Texas

  • Washington

  • Wyoming

If you are in one of these states, it’s likely you won’t have to pay state taxes on your unemployment. Be sure to check with a tax professional to make sure.

Strange and Funny Tax Laws Throughout History

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Tax season concluded late this year, with the filing deadline on July 15th. Between the COVID-19 pandemic and the economic instability that resulted from it, we are all a little stressed.

To lighten the mood, we decided to put together a list of funny and strange tax laws that have been levied throughout history. We’ve also included some strange tax laws that are still in place today.

In history:

In the past, governments taxed anything they could to make more revenue. This led to some very strange and interesting tax laws. Here are some of our favorites:

  • In 1660, England placed a tax on fireplaces, which drove the population to cover their fireplaces with bricks to conceal them. The law was repealed in 1689.

  • In 1705, Peter the Great placed a tax on beards in Russia, hoping to get more men to adopt a clean-shaven appearance that was common in Western Europe.

  • In 1696, England put a tax on windows, which taxed houses based on how many windows they had. The result of this was housing with fewer windows, which in turn caused health issues. Despite this, the law was not repealed until 1851.

  • In 1712, England passed a tax on printed wallpaper. Builders started hanging plain wallpaper, then painted designs on it to dodge the tax.

  • Japan imposed a tax on whiskey that was based on the percentage of alcohol by volume. European whiskey paid the price on this because they were not allowed to dilute their whiskey. Japanese makers did dilute their whiskey, so they had the advantage.

Today:

There are still some strange laws floating around today. Most of these examples are laws specific to states in America with a few exceptions. Check them out:

  • England has a tax on televisions. Everyone who has a television at home has to pay a yearly fee, which is called a television license fee. That fee is currently £157.50 ($197.96 USD) a year and £53($66.61) for black and white TV sets. This tax is used to find the BBC news service. If a blind person owns a TV, they only have to pay half the tax. You face a fine if you don’t pay the fee.

  • NYC has a special tax for prepared foods and for food. So something like a sliced bagel is taxed as both food and as a prepared food.

  • Tennessee began requiring drug dealers to anonymously pay taxes on the illicit substances they sell back in 2005. Alabama taxes the sale of illicit drugs by requiring sellers to have tax stamps. If someone from Alabama is caught with a large quantity of drugs, they will not only face drug charges, but also tax evasion charges.

  • In California, you pay a 33% tax on fruit you buy from a vending machine.

  • Double amputees in Oregon get a $50 tax credit.

  • If you’re over 100 in New Mexico, you are tax exempt, unless you are a dependant.

Why do you think these laws were created? What’s the story behind them? Did you enjoy the list?

 

How to Approach Buying Your First Investment Property

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You’ve probably heard that investment properties can provide a stream of passive income. While that may sound like easy money, there’s actually a lot of work involved in property investments. Before diving in headfirst, find out what you should do below.

Consider the Work Involved

Owning an investment property takes just as much work, if not more, than having your own home. If you choose to rent out the property, you’re responsible for covering just about everything a landlord covers when they rent out an apartment. If you aren’t prepared, the amount of work can quickly overwhelm you.

For that reason, many investors choose to hire a professional management company. A good company will offer local support whenever you need it, in addition to handling every aspect of running the property. By outsourcing your management, you don’t have to worry about routine home maintenance and dealing with tenants.

Beef Up Your Savings

If you currently have your own mortgage, then you already know how expensive it is to own a home. Even though you hope your investment property will generate some extra income, there are still a lot of expenses.

To start, you have to make a substantial down payment. Lenders usually want at least 25 percent down, which is a lot more than the standard 5 percent minimum for primary residences. So if you’re buying a second home in White Plains, you could easily have to put down more than $100,000 with home sales averaging $462,000 in the area.

If you have the cash needed to buy a home outright, you won’t need to worry about financing the purchase. However, there are still operating expenses. It’s a good idea to build a strong financial cushion to cover things such as routine maintenance and unexpected repairs. Having a good budget and a strong understanding of your cash flow is critical.

Start Small

It’s all too easy to bite off more than you can chew with your first investment property. For example, buying a home that needs major repairs can seriously hamper your ability to make money quickly.

There’s no rule against buying a fixer-upper for your first investment, but you have to think about how long it will take to get the home move-in ready. According to the House Flipping Academy, it can take three months to fix cosmetic repairs throughout the whole house, and up to one year to do a complete renovation. Consider the fact that you’ll be missing out on any potential rental income for that period of time. When you’re just starting out, it might be better to get a home that only needs one or two updates.

Choose a Property Wisely

When picking a home, be sure to think about your long-term goals. Will you hold onto it until you can sell it for profit? Or will you rent it out to families or vacationers? There are pros and cons to each decision. A residential rental property will need to be located in a neighborhood that attracts families or young professionals. A vacation property, on the other hand, should be in an area where people are going to actually want to book short-term rentals.

If you’re thinking about getting a vacation property, be aware that some cities are cracking down on the short-term rental industry. Always check local regulations before making a decision. And keep in mind that laws may change, potentially killing your idea for a successful short-term rental property.

If done right, property investment can be incredibly profitable whether you choose to rent out the home or sell it for profit at a later date. By having enough financial cushion, having a management plan in place, and choosing a property with a lot of potential, you’ll greatly improve your chances of success.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.