Do You Pay Taxes On… ?

woman cashing her stimulus check at the bank

Here, you will find the most commonly asked questions about paying taxes.

Do You Pay Taxes on Unemployment?

In the years before the Covid-19 pandemic, almost all types of unemployment compensation were taxable. In general, the IRS considers unemployment compensation as income, so it taxes it accordingly.

Passed in March 2021, the ARP (American Rescue Plan) now has a provision according to which unemployment compensation is tax-free up to $10,200 (in 2020). If you have already filed your 2021 tax return will have to file an amended return so that you recover (1) the extra $300-$600 a week you got under the CARES Act or (2) any taxes paid on your state unemployment payments. The hows and whens of this action are yet to be announced by the IRS. Also, the $300 weekly federal supplement is extended through September 2021.

At this point, though, do note that the unemployment benefits you will receive in 2021 remain taxable with next year’s return, unless a new measure is enacted in the future, providing tax relief. This is why we advise to withhold tax upfront, just to stay on the safe side. You may also use this IRS tool to help determine whether your unemployment compensation is taxable based on the income you have received.

Your 3 Options:

  1. You have the right to have federal income tax withheld from your unemployment compensation benefits, although you can’t decide on the amount you wish to be withheld. To do so, use the Voluntary Withholding Request (Form W-4V). Note that there is a flat rate of 10% for withholding federal income tax from unemployment benefits.
  2. If you do not elect to have taxes withheld from your unemployment benefits, you might be required to make quarterly estimated tax payments directly to the IRS. So, instead of having 10% withheld from your monthly unemployment checks, you pay once every three months while receiving unemployment benefits.
  3. Or you could have both – withholding from your unemployment benefits and making quarterly payments. This is a good choice if your refundable tax credits you are eligible for and the withheld taxes will be 100% of the total taxes you paid last year or below 90% of what you will owe. It is also a recommended option if you owe more than $1,000 after accounting for all the taxes withheld from your income sources.

As you can understand, this is a complicated situation that could easily get you facing government penalties if a mistake is made. For that reason, it is best to consult with a tax professional.

 

Do You Pay Taxes on Stimulus Checks?

According to the tax code, any income is taxable, irrespective of where you got it from, unless it is specifically excluded or exempted. When it comes to stimulus checks, one would expect them to be taxable, since there is no specific exclusion or exemption for them. However, the current law does not consider stimulus checks as income. Hence, you don’t need to pay taxes on the stimulus check money. In fact, the law views a stimulus payment as an advance payment of a tax credit (so, non-taxable income).

Here are some details. When you file Form 10400 (your 2020 federal income tax return), you will come across the Recovery Rebate Credit line (check the 2nd page). Make sure you do not disregard this line, especially if you had a dramatic change of circumstances in 2020. Some examples are as follows:

  • You are a recent college graduate.
  • You had a baby in 2020.
  • You experienced a major reduction in your income in 2020.
  • You are married and either you or your spouse does not have an SSN (Social Security Number).
  • You did not file a 2019 or 2018 tax return.
  • You did not receive any (or full) 1st or 2nd-round stimulus check.

If you meet the qualifying criteria of the stimulus check, you could save quite a lot of money with this credit.

Now, when it comes to calculating the credit amount and your stimulus check, the procedure is the same. Nevertheless, stimulus round 1 and 2 used the information from your 2019 or 2018 tax return while the tax credit is based on your 2020 tax return details. So, a change in your circumstances from 2019 to 2020 or failure to file a 2019 or 2018 return may as well lead to a difference between the sum of the credit amount and your stimulus checks. All in all, if your stimulus payments were higher than the credit allowed, you don’t need to pay anything (you keep the difference), whereas if the credit is higher than the total sum of your stimulus payments, you may receive a refund since your tax bill will be lower (in 2020).

 

Do You Pay Taxes on Stocks?

Briefly answered, if you made money, you pay taxes, based on what you paid for the stocks (the cost basis) and what you profited or made. Of course, you will need to report any income you earned from selling stocks, bonds, or other investments in 2020 on Schedule D of your tax return. This also includes interest or dividends you have earned (if any). In this case, you need to use a 1099-INT or 1099-DIV form. If you made a loss from selling stocks, you could get a write off up to $3,000 of these losses. You can ask your broker for a 1099-B form so you can fill in Schedule D on your tax return. Things change, though, if you have bought securities and kept them to yourself throughout 2020 as you won’t be called to pay any taxes.

To estimate how much you will owe in taxes on your stock gains, you will have to determine the tax bracket you are in. For the majority of investors, the rate is quite low and most of them are in the 22% bracket.

Don’t forget the 3.8% surtax on net investment income (i.e., royalties, annuities, passive rents, gains, dividends, taxable interest, etc.) that applies to:

  • Joint filers with more than $250,000 (modified adjusted gross incomes).
  • Single filers with over $200,000 (modified adjusted gross income).

Finally, short-term capital gains are taxes like your paycheck (as ordinary income) while long-term ones have a lower tax rate. For example, a married couple filing jointly with taxable income below $80,000 that has sold stock they owned for at least 12 months will not be asked to pay anything in long-term capital gains. If their income is between $80,000 – $496,000, they will pay 15% and 20% if it is higher.

 

Do You Pay Taxes on Social Security?

Yes, Social Security Income is taxable, in most cases at least (on a federal level), especially if you have a 401(K) or other sources of retirement income. However, your income level determines whether or not you will need to pay taxes on your Social Security benefits. If you go by solely with your Social Security checks, then chances are you won’t pay any taxes on the benefits you receive. Nevertheless, it is paramount to consult with a tax professional or financial advisor because state laws vary when it comes to taxing Social Security.

How to know if your Social Security Income is taxable? Check if your combined income (50% of your Social Security benefits + non-taxable interest + adjusted gross income) is above or below a certain threshold the IRS calls the base amount. The limit for a qualifying widower or widow with a dependent offspring, head of household, or single filer is $25,000. For joint filers, it is $32,000. So, if your combined income is over that limit, you will pay some tax. Married individuals filing separately will most likely pay taxes on their Social Security benefits.

According to the Social Security Administration, the following applies when calculating Social Security Income taxes in 2020:

  • Single filers whose combined income is between $25,000- $34,000 need to pay up to 50% of their Social Security benefits in income taxes.
  • Single filers whose combined income is over $34,000 will pay up to 85% of their Social Security benefits in taxes.
  • Married couples filing jointly with combined income between $32,000 – $44,000 will have to pay taxes on up to 50% of their Social Security income.
  • Married couples filing jointly with combined income over $44,000 will pay up to 85% of their Social Security benefits in taxes.
  • Individual taxpayers with a total income below $24,000 pay no taxes on their Social Security benefits.

You may use this IRS worksheet to calculate your Social Security tax liability. And, don’t forget that some states also require that you pay state income taxes, with 13 of them collecting taxes on Social Security income (at least some of it). Others, offer exemptions or deductions based on your income or age. Nevertheless, in 37 states, you won’t pay any taxes on your Social Security.

 

Do You Pay Taxes on an Inheritance?

In general, beneficiaries do not need to pay income tax on inheritance, be it property or money. It doesn’t matter if you are a designated beneficiary or receive the inheritance under the terms of a trust or will. It is not considered taxable income. Things change if the money is withdrawn from a 401(K) or IRA plan, which are regarded as tax-deferred until money is withdrawn from them. So, if you withdraw money from such an (inherited) account, you have to report it as ordinary income and the due tax will be determined by your state and federal annual income tax returns.

That being said, you can withdraw from an inherited retirement account over several years if you change it into an “inherited IRA” account. If you are a surviving spouse that inherits a retirement account, you can change it into a retirement account of your own to defer the tax.

Roth retirement plans are usually non taxable income as they are treated like any other inherited property. In general, you won’t need to pay income tax on money you take from an inherited Roth account if the account was opened and funded at least five years earlier. Also, if the deceased created and contributed to the particular Roth account you have inherited.

As for inherited property, you will pay taxes on any income produced by it.

For inherited bank accounts, you also pay no taxes on the money in the account, unless they start generating interest for you. Your taxable income, in this case, is the interest payments.

Finally, life insurance policy proceeds and appreciated inherited property may also be taxable income if you pay in installments over several years (in the first case) or the property you have inherited appreciated in value (in the second case).

Take into account that six states apply inheritance tax on an inherited property (Pennsylvania, New Jersey, Nebraska, Maryland, Kentucky, and Iowa) on top of your income tax. The exact sum depends on how closely related you were with the deceased one.

 

Do You Pay Taxes on Life Insurance?

In most cases, life insurance on non-taxable income. There are exceptions to the rule, though, which are illustrated right below (each case has a taxable and non-taxable side, if certain conditions are met):

  • Your beneficiary gets a lump sum payout.
  • Your beneficiary receives a gain in cash value (applies to cash value life insurances).
  • You make a partial withdrawal from the cash value (applies to permanent insurance).
  • You receive annual cash dividends.
  • You turn in your permanent life insurance policy for a most cost-effective term life insurance policy.
  • You accelerate your death benefit because you become terminally or chronically ill.

Life insurance is usually taxable when three individuals are involved (the owner buys life insurance for another family member and then names another member as the beneficiary). Also, when your estate exceeds the threshold of the relevant estate tax, you sell a life insurance policy, or profit from turning in your cash value policy.

As for life insurance premiums, they are considered personal expenses so they are NOT deducted when calculating your taxable income.

Do I Have To File Taxes?

older couple filing taxes

Filing taxes can be burdensome, especially considering the complexity of filing a tax return. With tax laws changing almost overnight sometimes, it goes without saying that taxpayers often find themselves midst a tax storm that they do not know how to handle. 

Questions like ‘Do I need to file taxes if I collect Social Security?” “What about the case when I get Disability benefits?” “Do I file a tax return if I am retired?” are very common. Hopefully, this guide will help you figure some basics out and answer commonly asked questions about filing taxes. 

 

Do I Have To File Taxes If I Collect Social Security?

In general, individuals must file taxes if (1) they are unmarried, (2) their gross income is at least $14,050 or (3) are below 65 years of age. However, those that live exclusively on Social Security benefits have no gross income, which means that they do not have to file a federal income tax return. Also, you do not need to include your Social Security benefits in your gross income if your only source of income is your Social Security benefits. 

Things change if you earn additional, not tax-exempt income. In this case, you need to determine whether your annual gross income exceeds the $14,050 threshold. Beginning in 2018, tax exemptions are no longer considered part of your taxable income. So, you must use only your standard deduction. For the 2020 tax year, your Social Security benefits are regarded as gross income if:

  • You are married and file a separate tax return with your spouse. In this case, 85% of your Social Security benefits are regarded as gross income, which means that you may need to file a tax return. 
  • You are married filing jointly, and the sum of 50% of your Social Security plus any tax-exempt interest and other income is higher than $32,000. 
  • Half your Social Security plus other income is higher than $25,000, irrespective of your filing status. 

Note: For senior citizens (over 65 years of age) collecting Social Security benefits, the law is more gentle and flexible as it enables them to reduce the tax amount they must pay on their taxable income. As long as their income is not high (not including Social Security funds), they can lower their tax bill on a dollar-for-dollar basis using a special tax credit called Credit for the elderly or disabled (aka Schedule R).

 

Do I Have To File Taxes If I Did Not Work? 

In general, unemployment checks from the state are taxable. So, it depends on the collected unemployment. The current tax law wants individuals collecting or earning at least $8,000 to file taxes. Another important aspect to consider before answering this question is whether tax was withheld on the unemployment check payment or not. 

It should be noted that unemployment benefits are not free money. In fact, you need to take proper measures today to avoid unwanted surprises in the future when you receive your tax bills the following year. This is because unemployment money is taxable income. So, although you don’t need to pay Medicare or Social Security taxes, you will need to pay state and federal taxes in some jurisdictions while receiving unemployment benefits. 

Of course, some states, such as Virginia, Pennsylvania, Oregon, New Jersey, Montana, or California, waive this particular type of income. This means that if you live in any of these states, your unemployment benefits are tax-free. On the other hand, seven states (so far) do not impose any state income taxes. These include Washington, Texas, South Dakota, Nevada, Florida, and Alaska. 

Tip: The best course of action is to have taxes withheld from your unemployment benefits check, especially if you have earned income this year. The same applies to when you expect to be employed or hired again shortly, which will put you in a higher tax bracket. This, in turn, may make you ineligible for as many credits to offset your earnings. 

How to request the withholding:

  • Fill out form W-4V either online or via the benefits portal (depends on your state).  The Labor Department mentions that you can withhold a flat federal tax rate of 10% of the paid benefits from every payment. 
  • Request a W-4V from your state’s unemployment office if you are already collecting unemployment and then change your withholding. 
  • Take the money out of your checking account, and put it in a little envelope, or put it in a savings account. 

A key factor to bear in mind is your earned income tax credit (EITC) if you are currently unemployed and are worried about how this kind of money will affect your taxes. Depending on your income and whether you have any dependents (and how many), the EITC can provide you  between $538 and $6,660 in tax credits. Those eligible for it can use the tax credit to offset the amount they owe on their tax bill. The 2020 EITC income limit is $15,820 for single individuals or married couples with no children and $21,710 for married couples that file jointly. 

 

Do I Have To File Taxes If I’m Retired?

In short, yes. Your retirement taxes are determined by how much retirement income you draw every year and the sources of your retirement income. And, the kind of money you need to live on is directly related to your taxes. This may sound a paradox, but, in reality, the government never collects taxes on your Social Security money during your working years. The logic is that it simply holds onto it for you. Let’s look into an example to make things a bit clearer:

Suppose you get paid $5,000 every month as an employee. Your employer withholds the 6.2% Social Security tax rate (so, around $310) from your pay every month while contributing that 6.2% on your behalf to the federal government. They pay no tax on that sum, though. Then, when you turn 62 or older, the government gives back the money that went toward Social Security when you file a Social Security retirement benefits claim. Until that moment, nobody has paid taxes for that money.

So, will you owe taxes on your Social Security benefits in the end, and how much? According to the Social Security Administration, one in every four retirees will be called to pay income taxes on their Social Security benefits. For more details, check out the table below: 

Combined* Income Individual Return Married, Separate Return Married, Joint Return
$0-$24,999 No tax
$25,000-$34,000 Up to 50% of Social Security may be taxable
> $34,000 Up to 85% of Social Security may be taxable
$0-$31,999 No tax
$32,000-$44,000 Up to 50% of Social Security may be taxable
> $44,000 Up to 85% of Social Security may be taxable
$0+ Up to 85% of Social Security may be taxable

 

* This refers to half of your Social Security benefits, your nontaxable income, and your adjusted gross interest income, which is your total income minus income adjustments. Adjustments to gross income can be contributions to self-employment retirement plans, alimony paid, student loan interest deduction, and more.

Tip: To avoid paying taxes when you are a retiree, take note of the income you receive. If it is low enough, you won’t get taxed for it. Check the tax bracket into which your taxable income falls after calculating your earned and unearned taxable income. This will help determine whether you will need to pay income taxes or not. Your retirement tax bracket determines the exact way your taxable income is determined when you are in your working/productive years. As soon as you add up your taxable income sources, subtract your itemized or standard deduction, and apply any tax credits you may qualify for. Then form 1040SR or 1040

Below is a table showing the standard deduction for taxpayers over 65 years of age for the 2020 tax year. 

Filing Status Standard Deduction Senior Bonus Total Deduction
Head of household $18,650 $1,650 $20,300
Married filing jointly  $24,800 $1,300 per senior spouse $26,100 
Married filing separately $12,400 $1,300 $13,700
Single $12,400 $1,650 $14,050

 

 

Do I Have To File Taxes If I Collect Disability? 

Again, it depends on the income you receive and whether your spouse also gets an income (or not). If you are single and your Social Security Disability benefits are your sole income source, you don’t need to file taxes. For total incomes that exceed $25,000, it is paramount (and required by law) to file a federal tax return as an individual. The same applies to joint filers if their total combined income is more than $32,000. 

However, note that you will NOT be asked to pay taxes on the entire sum you receive from Social Security Disability if you fall within any of the brackets mentioned above. You usually need to file a federal tax return in the following situations:

    • You earn between $25,000-$34,000 as an individual – You might pay income tax on 50% of the sum you received from the Social Security Administration. 
    • You earn >$34,000 as an individual – You will probably need to pay taxes up to 85% of your SSD (Social Security Disability) benefits. 
    • You file jointly with your spouse and have a combined income between $32,000-$44,000 – You might have to pay taxes on 50% of your SSD benefits. The sum goes up to 85% of your SSD benefits if your income is over $44,000 (always referring to your combined sum). 
  • You also have a pension.
  • You collect short-term disability that is being provided by your employer. 

In general, though, if you have paid for your own disability policy, you won’t need to file a tax return. 

 

Do I Have To File Taxes On A Summer Job?

The majority of taxpayers are allowed to earn a specific amount of income every year without having to file a federal tax return or pay taxes. But, if you are obliged by law to file a tax return, it is critical that you have your earned income reported by your summer employer on a W-2

Full-time students may not need to file a return if they work for just a couple of months in the summertime. Nevertheless, if you qualify for a tax refund for taxes withheld from your paychecks, it is advised to file a return so you can claim that refund. Take note that if you show as a dependent on your parents’ tax return, though, you will have to file a tax return if you received more than $1,100 of unearned income (i.e., dividends and other non-employment income), irrespective of other earnings you may have. The same applies if your total earnings are higher than the standard deduction set for dependents.

 

Do I Have To File Taxes If I’m Married But Don’t Work?

You can choose to file separately or jointly on your income tax returns, with the first option being the most beneficial for you, most of the time, at least. This is because the IRS provides larger standard deductions to joint filers every year, which enables them to deduct more money from their income than those filing separately. For example, married couples filing jointly receive a $24,800 deduction while those filing separately only receive a standard deduction of $12,400. 

Plus, you are eligible for more tax credits, such as the Earned Income Tax Credit and the Child and Dependent Care Tax Credit. On top of that, joint filers earn a larger amount of income due to the higher income threshold for specific deductions and taxes while they may also qualify for certain tax breaks. 

There are, of course, some rare cases when filing separately is more preferred than filing jointly. You can contact us and give us the details of your case. Our tax relief professionals will then suggest the filing status that gives you the biggest tax savings