Billionaire entrepreneur Jeff Bezos said: "Life's too short to hang out with people who aren't resourceful." If you've been creatively finding ways to make ends meet through the coronavirus pandemic, pat yourself on the back -- you're the type Bezos might include in his circle of friends. Unfortunately, being Bezos' type is no help when it comes to paying your taxes.
In March, the Treasury Department and the Internal Revenue Service (IRS) extended the federal tax filing date from April 15, 2020, to July 15, 2020. The extension also applies to federal income tax payments due on April 15; taxpayers can wait to pay those until July 15 also, without the usual penalties and interest. Thanks to those extensions, you might be ignoring the whole topic of taxes right now, especially if the coronavirus pandemic has you seeking out new sources of income to pay your bills.
Unfortunately, those new sources of income might be precisely the reason you should be thinking about your taxes. You already know that wages and side hustle income are taxable. But did you know you might also be incurring taxes on your unemployment income, Social Security benefits, barter income, and even canceled debt? It's true. Here's what you need to know.
Taxes on unemployment income
Unemployment benefits are taxed at the federal level and, more often than not, by your home state, too. There are only 15 states that don't tax unemployment benefits; these include states like Florida that have no income tax at all, plus Alabama, California, Montana, New Hampshire, New Jersey, Pennsylvania, and Virginia.
If you're filing for or receiving unemployment, ask to have taxes withheld from those checks. If you opt for no withholdings, you will need to make quarterly tax payments on that income.
Taxes on Social Security income
If you claimed Social Security this year, you may not yet be familiar with how these benefits are taxed. Here's the gist of it. The federal government taxes up to 85% of your Social Security benefits when your "combined income" is above $34,000 for individual filers or above $44,000 for married filers. Combined income equals your adjusted gross income, plus nontaxable interest, plus half of your Social Security benefits. Lower thresholds of $24,000 for individuals and $32,000 for joint filers apply that can force you to include up to half your Social Security in taxable income.
You may also owe state taxes on these benefits. In 2020, 13 U.S. states tax your Social Security income, including Colorado, Missouri, New Mexico, and Rhode Island.
You can request federal tax withholding from your Social Security checks using IRS Form W-4V. Unfortunately, the feds won't withhold state taxes for you. If you live in one of those 13 states that taxes Social Security, consider making quarterly tax payments. Check in with your state's department of revenue or department of taxation on the process and requirements for your tax payments.
Taxes on barter income
Say you are a web designer and your neighbor is a SEO expert. You're both launching side hustles, so you decide to trade services: You design your neighbor's website and your neighbor creates a SEO plan for your website. In the eyes of the IRS, the SEO plan you receive from your neighbor is taxable income. As such, you'd have to report the market value of the SEO plan on Schedule C of your 2020 tax return. And your neighbor would report the value of the website design as income, too.
Paying taxes on barter income can be painful, since you never received any cash in the deal. It's not like you can rip a page out of your SEO plan and send it to the IRS as payment. That's why it's smart to proceed with caution on high-value trades, because you may have to pull cash from other sources to square up with the IRS.
Taxes on canceled debt, including repossessions
For the most part, you'll also typically owe taxes on any canceled debt, including loan cancellations that involved a repossession. The IRS treats a repossession as if you'd sold the car back to the lender. If you owe more than the market value of the car, the excess debt that's forgiven is taxable. So, let's say you owe $6,000 on a car loan and your car is worth $5,000. If that car gets repossessed, the $1,000 difference between the car's value and the loan balance is forgiven debt and, therefore, should be reported as taxable income.
Note that debt canceled as part of a bankruptcy is not counted as income, nor is forgiven mortgage debt on your primary home.
Plan now for those taxes
If you are keeping your bills paid through a combination of government benefits, side hustles, and barters, be as resourceful about your tax liability. Ask for withholding on unemployment or Social Security, and then set aside 20% to 25% of anything else you make. You should ideally make quarterly tax payments starting on July 15 to avoid getting hit with a penalty next year for insufficient withholding.
Bartering deals and forgiven debt are harder to manage. Keep a running tally of your taxable income from these non-cash sources. If the total runs up into the thousands, start saving now to fund a tax payment later this year. Or, if you're confident you'll have a regular job before year-end, you could ask for extra withholding on those future wages to make up any shortfall.