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Are Social Security Disability Benefits Taxable?
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Social Security benefits, including disability benefits, can help provide a supplemental source of income to people who are eligible to receive them. If you’re receiving disability benefits from Social Security, you might be wondering whether you’ll owe taxes on the … Continue reading →

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Reducing Capital Gains Tax on a Rental Property
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Owning a rental property can help you to grow wealth long-term and diversify your income streams. Receiving regular rental income can help supplement withdrawals you might make from a 401(k) or an individual retirement account (IRA) in retirement or give you an … Continue reading →

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A Comprehensive Guide to 2020 Tax Credits
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Every year, people’s lives change in ways that affect their taxes. They may start a higher education program or have a child, and others take on elderly parents as dependents. These situations can change their eligibility for tax credits. In … Continue reading →

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Guide to Managing Medical Benefits When You Leave or Start a Job
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Leaving a job typically means saying goodbye to workplace benefits such as health insurance and medical spending accounts. No matter if you quit, get fired, or get furloughed, it's essential to know your options so you can make the most of those perks.

If you're starting a new job with benefits or becoming self-employed, you'll have critical decisions to make about what's best for you and your family. I recently received a couple of questions about how to handle benefits during work transitions, and I'll answer them throughout this post. We'll review the best options for managing medical benefits when you leave or start a new job.

What happens to health insurance when you leave a job?

When it's time to leave a job with benefits, it's essential to let your employer know so you can evaluate your options for managing or replacing them right away. The sooner you understand your choices, the more time you'll have to do your homework and consider what's best. 

Any insurance perks you have typically end on the last day of the month you get terminated. So, be strategic about choosing your last day, when possible.

If you leave an employer on good terms or get a severance package, ask for an extra month or two of medical coverage if you need it.

For instance, if you work through November 30, your health insurance may end on that day. But if you work through December 1, your insurance may last until December 31. Also, remember that most things in business are negotiable. If you leave an employer on good terms or get a severance package, ask for an extra month or two of medical coverage if you need it.

Here are four work transitions you may need to manage:

1. You leave a job for a new employer with benefits

Congrats! Benefits at your new job may start on your first day, or you may be subject to a waiting period, such as 30 or 90 days. Don't roll the dice with a gap in critical coverages such as health and life insurance. Something unexpected—a car accident, illness, or death—could be financially devastating for you or your surviving family.

If you have a spouse or partner who also has workplace insurance benefits, you may be wondering which plan to choose or whether you can double up on benefits. Keep reading for tips to handle this situation wisely. 

2. You leave a job for a new employer with no benefits

If your new job is with a small company, it may not offer expensive perks such as health insurance. But that doesn't mean you can't get affordable coverage on your own, which we'll cover in a moment.

3. You leave a job and become unemployed

No matter if your workplace doesn't offer benefits or you're unemployed, there are ways to get low- or no-cost health insurance.

4. You leave a job and become self-employed

When you work for yourself, you need to provide your own medical benefits package, and the same advice will apply, so keep reading.

What is COBRA continuation coverage?

A critical right you should be familiar with is COBRA continuation coverage. COBRA, which stands for the Consolidated Omnibus Budget Reconciliation Act, is a law that requires an insurer to continue your employer-sponsored medical insurance, including health, dental, and vision policies after you're no longer employed.

Anytime you leave a job with group health benefits, you can purchase COBRA coverage for a period. Your benefits administrator should give you information about your right to apply for COBRA coverage and the cost.

Anytime you leave a job with group health benefits, you can purchase COBRA coverage for a period.

You can purchase the same or fewer medical benefits than you had before you quit, got laid-off, or fired from your job. But the price won't be the same—COBRA coverage can be expensive because your previous employer does not subsidize it.

You must pay the full COBRA premiums, plus a 2% administrative charge, to the insurer. While it will cost more than you're used to, the upside is that your coverage will be seamless, and you'll be familiar with it.

COBRA protects everyone affected by the loss of group health insurance, including the former employee, his or her spouse, former spouses, and dependent children—when certain qualifying events occur, such as termination or reduction of work hours. It typically lasts for up to 18 months. However, if you're a surviving spouse or divorced from a covered employee, COBRA may continue for up to 36 months.

Don't make the mistake of thinking that you'll just wait and get health insurance when you get a new job or when you become eligible after a new employer's waiting period. If you get sick or need a trip to the emergency room, you could end up with a massive bill.

If you're not eligible for regular, federal COBRA, many states offer similar programs called Mini COBRA. To learn more, check with your state's department of insurance.

How do you get individual health insurance?

If you don't have the option to get COBRA medical benefits or can't afford it, your next best option is to shop for ACA-qualified health insurance. ACA stands for the Affordable Care Act, which set standards, known as essential health benefits, and provides subsidies that make qualified plans more affordable.

If you qualify for an ACA subsidy based on your income and family size, it can make a health plan much less expensive than COBRA continuation.

If you qualify for an ACA subsidy based on your income and family size, it can make a health plan much less expensive than COBRA continuation. But if you have high income and don't qualify for reduced premiums, COBRA may cost about the same or even give you better benefits.

So, shop and compare the cost of COBRA to a private policy when possible. Open enrollment for ACA-qualified health plans is limited to the last few weeks of the year. However, losing your group coverage at work is one of several life events that qualify you for a special enrollment period or SEP to get coverage. But you only have 60 days to sign up for an ACA plan after losing your insurance at work, so don't put it off.

If you miss the special enrollment deadline, you generally won't be able to get a marketplace plan unless you have another qualifying life event. These include getting married, having a child, or exhausting your maximum period of COBRA coverage.

You can get quotes for an ACA-qualified health plan from the following:

  • Healthcare.gov (the federal healthcare marketplace)
  • Your state's online healthcare marketplace (if you live in California, Colorado, Connecticut, District of Columbia, Idaho, Maryland, Massachusetts, Minnesota, Nevada, New York, Rhode Island, Vermont, or Washington)
  • Insurance aggregator sites, such as Bankrate.com and eHealth.com
  • Insurance brokers

Depending on your income, family size, and the state where you live, you may qualify for free or low-cost coverage from Medicaid or the Children's Health Insurance Program (CHIP). Also, note that if you're younger than 26, you can enroll in a parent's health plan even if you don't live at home or are married.

Can you have more than one health insurance plan?

Jamie left a voicemail and asks:

I'm starting a new job soon and am wondering if I should enroll in the dental and vision benefits because I already have them under my husband's insurance. How should I compare insurance policies if I need to choose between different plans?

It's not against the law to have more than one medical insurance policy, but it may be a waste of money. Having more than one medical plan doesn't mean that you get reimbursed twice for covered benefits.

Having more than one medical plan doesn't mean that you get reimbursed twice for covered benefits.

The plan you get through your employer becomes primary, and the one through a spouse or partner's employer is secondary. After the primary policy covers you, the secondary would pick up any remaining covered cost. But the combined coverage can't exceed 100% of the cost.

When you have dual health or dental plans, you must pay deductibles for both of them. In other words, you may still have out-of-pocket costs even when you have more than one plan.

Whether you could save money by enrolling in more than one medical insurance plan depends on several factors, such as the monthly premium, annual deductible, and how high your healthcare expenses could be in the future.

You'll need to make these same comparisons when you're choosing between different plans. Evaluate monthly premiums, annual deductibles, co-payments, co-insurance, and the doctor networks to estimate which one is best for your situation. 

To get some help, speak to an insurance representative from each plan you're considering. Ask them about the types of healthcare services you and your family typically need or have needed in the past. You can't predict how healthy you'll be going forward. But to evaluate different plans, or know if having more than one plan is worthwhile, you must consider your previous expenses for health, dental, and vision care. So gathering that information should be part of your research.

What happens to an HSA when you leave a job?

Adam asks, "My employer makes contributions to my HSA every payday. Do I have to repay them if I leave my job to start my own business?"

Another insurance-related benefit that you may have at work is a tax-advantaged health savings account or HSA. You're eligible for an HSA when you're enrolled in a high-deductible health plan (HDHP). Having an HDHP may be a good option when you want lower premiums, are in relatively good health, and are likely to take advantage of an HSA.

An HSA is portable, so you can take it with you if you leave an employer.

The good news is that an HSA is portable, so you can take it with you if you leave an employer. Your account balance, including amounts contributed by your old employer, are yours to spend tax-free on eligible medical expenses with no spending deadline.

You can spend an HSA on qualified expenses for you or your family members, even if you don't have a high-deductible plan or you're uninsured. However, you can't make any new HSA contributions when you're not covered by HDHP. 

If you become unemployed, you can use an HSA for COBRA premiums, or for other health insurance while you're receiving unemployment compensation. But if you spend HSA money on non-qualified medical expenses, the amounts will be taxed as income, plus you must pay an additional 20% penalty.

What happens to an FSA when you leave a job?

Another medical spending account you may need to manage when you leave a job is an FSA or flexible spending arrangement. These accounts can only be offered by employers and get funded by pre-tax payroll deductions that you can use for childcare and medical expenses.

Make sure you empty the account by spending the funds on qualified purchases before your last day of work or by the end of the month.

FSAs have a use-it-or-lose-it policy, which means the amounts you've contributed will be forfeited if you don't spend them before leaving a job. Make sure you empty the account by spending the funds on qualified purchases before your last day of work or by the end of the month.

Whether leaving a job is cause for tears or celebration, you can make smart decisions about your medical benefits and save money with some strategic planning. Be sure to ask your benefits administrator or your plan providers for help when you need it.

Continue readingGuide to Managing Medical Benefits When You Leave or Start a Job
Strategies for Avoiding and Reducing Taxes
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Taxes can take a big bite out of your income, especially if you’re in a higher income tax bracket. And even with careful planning, it’s possible that you could still be hit with an unexpected tax bill. The good news … Continue reading →

The post Strategies for Avoiding and Reducing Taxes appeared first on SmartAsset Blog.

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Should You Transfer Balances to No-Interest Credit Cards Multiple Times?
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Karen, our editor at Quick and Dirty Tips, has a friend named Heather who listens to the Money Girl podcast and has a money question. She thought it would be a great podcast topic and sent it to me. 

Heather says:

I had a financial crisis and ended up with a $2,500 balance on my new credit card, which had a no-interest promotion for 18 months when I got it. That promotional rate is going to expire in a couple of months. I have good credit, and I keep getting offers from other card companies for zero-interest balance transfer promotions. Would it be a good idea to apply for another card and transfer my balance so I don't have to pay any interest? Are there any downsides that I should watch out for?

Thanks, Karen and Heather! That's a terrific question. I'm sure many podcast listeners and readers also wonder if it's a good idea to transfer a balance multiple times. 

This article will explain balance transfer credit cards, how they make paying off high-interest debt easier, and tips to handle them the right way. You'll learn some pros and cons of doing multiple balance transfers and mistakes to avoid.

What is a balance transfer credit card or offer?

A balance transfer credit card is also known as a no-interest or zero-interest credit card. It's a card feature that includes an offer for you to transfer balances from other accounts and save money for a limited period.

You typically pay an annual percentage rate (APR) of 0% during a promotional period ranging from 6 to 18 months. In general, you'll need good credit to qualify for the best transfer deals.

Every transfer offer is different because it depends on the issuer and your financial situation; however, the longer the promotional period, the better. You don't accrue one penny of interest until the promotion expires.

However, you typically must pay a one-time transfer fee in the range of 2% to 5%. For example, if you transfer $1,000 to a card with a 2% transfer fee, you'll be charged $20, which increases your debt to $1,020. So, choose a transfer card with the lowest transfer fee and no annual fee, when possible.

When you get approved for a new balance transfer card, you get a credit limit, just like you do with other credit cards. You can only transfer amounts up to that limit. 

Missing a payment means your sweet 0% APR could end and that you could get charged a default APR as high as 29.99%!

You can use a transfer card for just about any type of debt, such as credit cards, auto loans, and personal loans. The issuer may give you the option to have funds deposited into your bank account so that you can send it to the creditor of your choice. Or you might be asked to complete an online form indicating who to pay, the account number, and the amount so that the transfer card company can pay it on your behalf.

Once the transfer is complete, the debt balance moves over to your transfer card account, and any transfer fee gets added. But even though no interest accrues to your account, you must still make monthly minimum payments throughout the promotional period.

Missing a payment means your sweet 0% APR could end and that you could get charged a default APR as high as 29.99%! That could easily wipe out any benefits you hoped to gain by doing a balance transfer in the first place.

How does a balance transfer affect your credit?

A common question about balance transfers is how they affect your credit. One of the most significant factors in your credit scores is your credit utilization ratio. It's the amount of debt you owe on revolving accounts (such as credit cards and lines of credit) compared to your available credit limits. 

For example, if you have $2,000 on a credit card and $8,000 in available credit, you're using one-quarter of your limit and have a 25% credit utilization ratio. This ratio gets calculated for each of your revolving accounts and as a total on all of them.  

Getting a new balance transfer credit card (or an additional limit on an existing card) instantly raises your available credit, while your debt level remains the same. That causes your credit utilization ratio to plummet, boosting your scores.

I recommend using no more than 20% of your available credit to build or maintain optimal credit scores. Having a low utilization shows that you can use credit responsibly without maxing out your accounts.

Getting a new balance transfer credit card (or an additional limit on an existing card) instantly raises your available credit, while your debt level remains the same. That causes your credit utilization ratio to plummet, boosting your scores.

Likewise, the opposite is true when you close a credit card or a line of credit. So, if you transfer a card balance and close the old account, it reduces your available credit, which spikes your utilization ratio and causes your credit scores to drop. 

Only cancel a paid-off card if you're prepared to see your credit scores take a dip.

So, only cancel a paid-off card if you're prepared to see your scores take a dip. A better decision may be to file away a card or use it sparingly for purchases you pay off in full each month.

Another factor that plays a small role in your credit scores is the number of recent inquiries for new credit. Applying for a new transfer card typically causes a slight, short-term dip in your credit. Having a temporary ding on your credit usually isn't a problem, unless you have plans to finance a big purchase, such as a house or car, within the next six months.

The takeaway is that if you don't close a credit card after transferring a balance to a new account, and you don't apply for other new credit accounts around the same time, the net effect should raise your credit scores, not hurt them.

RELATED: When to Cancel a Credit Card? 10 Dos and Don’ts to Follow

When is using a balance transfer credit card a good idea?

I've done many zero-interest balance transfers because they save money when used correctly. It's a good strategy if you can pay off the balance before the offer's expiration date. 

Let's say you're having a good year and expect to receive a bonus within a few months that you can use to pay off a credit card balance. Instead of waiting for the bonus to hit your bank account, you could use a no-interest transfer card. That will cut the amount of interest you must pay during the card's promotional period.

When should you do multiple balance transfers?

But what if you're like Heather and won't pay off a no-interest promotional offer before it ends? Carrying a balance after the promotion means your interest rate goes back up to the standard rate, which could be higher than what you paid before the transfer. So, doing another transfer to defer interest for an additional promotional period can make sense. 

If you make a second or third balance transfer but aren't making any progress toward paying down your debt, it can become a shell game.

However, it may only be possible if you're like Heather and have good credit to qualify. Balance transfer cards and promotions are typically only offered to consumers with good or excellent credit.

If you make a second or third balance transfer but aren't making any progress toward paying down your debt, it can become a shell game. And don't forget about the transfer fee you typically must pay that gets added to your outstanding balance. While avoiding interest is a good move, creating a solid plan to pay down your debt is even better.

If you have a goal to pay off your card balance and find reasonable transfer offers, there's no harm in using a balance transfer to cut interest while you regroup. 

Advantages of doing a balance transfer

Here are several advantages of using a balance transfer credit card.

  • Reducing your interest. That's the point of transferring debt, so you save money for a limited period, even after paying a transfer fee.
  • Paying off debt faster. If you put the extra savings from doing a transfer toward your balance, you can eliminate it more quickly.
  • Boosting your credit. This is a nice side effect if you open a new balance transfer card and instantly have more available credit in your name, which lowers your credit utilization ratio.

Disadvantages of doing a balance transfer

Here are some cons for doing a balance transfer. 

  • Paying a fee. It's standard with most cards, which charge in the range of 2% to 5% per transfer.
  • Paying higher interest. When the promotion ends, your rate will vary by issuer and your financial situation, but it could spike dramatically. 
  • Giving up student loan benefits. This is a downside if you're considering using a transfer card to pay off federal student loans that come with repayment or forgiveness options. Once the debt gets transferred to a credit card, the loan benefits, including a tax deduction on interest, no longer apply. 

Tips for using a balance transfer credit card wisely

The best way to use a balance transfer is to have a realistic plan to pay off the balance before the promotion expires.

The best way to use a balance transfer is to have a realistic plan to pay off the balance before the promotion expires. Or be sure that the interest rate will be reasonable after the promotion ends.

Shifting a high-interest debt to a no-interest transfer account is a smart way to save money. It doesn't make your debt disappear, but it does make it less expensive for a period.

If you can save money during the promotional period, despite any balance transfer fees, you'll come out ahead. And if you plow your savings back into your balance, instead of spending it, you'll get out of debt faster than you thought possible.

Continue readingShould You Transfer Balances to No-Interest Credit Cards Multiple Times?
Wealth Tax: Definition, Examples, Pros and Cons
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A wealth tax is a type of tax that’s imposed on the net wealth of an individual. This is different from income tax, which is the type of tax you’re likely most used to paying. The U.S. currently doesn’t have … Continue reading →

The post Wealth Tax: Definition, Examples, Pros and Cons appeared first on SmartAsset Blog.

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Which Debts Should You Prepay First? A 6-Step Plan
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Maya asks:

“Is it better to pay off student loans or a mortgage first? I’m asking for my brother, who took out $80,000 in student loans about 20 years ago and has only paid off about $10,000. He recently bought a home in Southern California and took out a 30-year mortgage that might be as much as $400,000. I don’t know the interest rates he’s paying on these debts. I think he should pay off his student loans first because the total debt is smaller, older, and can’t be discharged in a bankruptcy. What do you think?”

Thanks for your question, Maya! This dilemma is common, especially now that most federal student loans are in automatic forbearance from March 13 to September 30, 2020, due to coronavirus-related economic relief. That means millions of student loan borrowers suddenly have the option to stop making payments without adverse financial consequences, such as hurting their credit or getting charged additional interest or fees.

If you have qualifying student loans and you're dealing with financial hardship due to the pandemic or another challenge, you may be grateful to have your payments suspended. But if your finances are in good shape and you don’t have any dangerous debts, such as high-rate credit cards or loans, you may be wondering what to do with the extra money. Should you send it to your student loans despite the forbearance, to your mortgage, or to some other account?

RELATED: 10 Things Student Loan Borrowers Should Know About Coronavirus Relief

6 Steps to Decide Whether to Pay Off Student Loans or a Mortgage First

Let's take a look at how to prioritize your finances and use your resources wisely during the pandemic. This six-step plan will help you make smart decisions and reach your financial goals as quickly as possible.

1. Check your emergency savings

While many people begin by asking which debt to pay off first, that’s not necessarily the right question. Instead, zoom out and consider your financial life's big picture. An excellent place to start is to review your emergency savings.

If you’ve suffered the loss of a job or business income during the pandemic, you’re probably very familiar with how much or how little savings you have. But if you haven’t thought about your cash reserve lately, it’s time to reevaluate it.

Having emergency money is so important because it keeps you from going into debt in the first place. It keeps you safe during a rough financial patch or if you have a significant unexpected expense, such as a car repair or a medical bill.

How much emergency savings you need is different for everyone. If you’re the sole breadwinner for a large family, you may need a bigger financial cushion than a single person with no dependents and plenty of job opportunities.

If you’re the sole breadwinner for a large family, you may need a bigger financial cushion than a single person with no dependents and plenty of job opportunities.

A good rule of thumb is to accumulate at least 10% of your annual gross income as a cash reserve. For instance, if you earn $50,000, make a goal to maintain at least $5,000 in your emergency fund.

You might use another standard formula based on average monthly living expenses: Add up your essential costs, such as food, housing, insurance, and transportation, and multiply the total by a reasonable period, such as three to six months. For example, if your living expenses are $3,000 a month and you want a three-month reserve, you need a cash cushion of $9,000.

If you have zero savings, start with a small goal, such as saving 1 to 2% of your income each year. Or you could start with a tiny target like $500 or $1,000 and increase it each year until you have a healthy amount of emergency money. In other words, it might take years to build up enough savings, and that’s okay—just get started!

Your financial well-being depends on having cash to meet your living expenses comfortably, not on paying a lender ahead of schedule.

Unless Maya’s brother has enough cash in the bank to sustain him and any dependent family members through a financial crisis that lasts for several months, I wouldn’t recommend paying off student loans or a mortgage early. Your financial well-being depends on having cash to meet your living expenses comfortably, not on paying a lender ahead of schedule.

If you have enough emergency savings to feel secure for your situation, keep reading. Working through the next four steps will help you decide whether to pay down your student loans or mortgage first.

2. Reach your retirement goals

In addition to saving for potential emergencies, it’s critical to save regularly for your retirement before paying down a student loan or mortgage early. So, if Maya’s brother isn’t contributing regularly to meet a retirement goal, that’s the next priority I’d recommend for him.

Consider this: If you invest $500 a month for 35 years and have an average 8% return, you’ll end up with an impressive retirement nest egg of more than $1.2 million! But if you wait until 10 years before retirement to start saving, you’d have to invest over $5,000 a month to have $1 million in the bank. When it comes to your retirement savings, procrastinating can make the difference between scraping by or have a comfortable lifestyle down the road.

When it comes to your retirement savings, procrastinating can make the difference between scraping by or have a comfortable lifestyle down the road.

A good rule of thumb is to invest at least 10% to 15% of your gross income for retirement. For instance, if you earn $50,000, make a goal to contribute at least $5,000 per year to a tax-advantaged retirement account, such as an IRA or a retirement plan at work, such as a 401(k) or 403(b).

For 2020, you can contribute up to $19,500, or $26,000 if you’re over age 50, to a workplace retirement account. Anyone with earned income (even the self-employed) can contribute up to $6,000 (or $7,000 if you’re over 50) to an IRA.

The earlier you make retirement savings a habit, the better. Not only does starting sooner give you more time to contribute money, but it leverages the power of compounding, which allows the growth in your account to earn additional interest. That’s when you’ll see your retirement account value mushroom!

3. Have the right insurance

In addition to building an emergency fund and saving for retirement, an essential part of taking control of your finances is having adequate insurance. Many people get into debt in the first place because they don’t have enough of the right kinds of coverage—or they don’t have any insurance at all.

Without enough insurance, a catastrophic event could wipe out everything you’ve worked so hard to earn.

As your career progresses and your net worth increases, you’ll have more income and assets to protect from unexpected events. Without enough insurance, a catastrophic event could wipe out everything you’ve worked so hard to earn.

Make sure you have enough health insurance to protect yourself and those you love from an illness or accident jeopardizing your financial security. Also, review your auto and home or renters insurance coverage. And by the way, if you rent and don’t have renters insurance, you need it. It’s a bargain for the protection you get; it only costs $185 per year on average. 

And if you have family who would be hurt financially if you died, you need life insurance to protect them. If you’re in relatively good health, a term life insurance policy for $500,000 might only cost a couple of hundred dollars per year. You can get free quotes for many different types of insurance using sites like Bankrate.com or Policygenius.com.

If Maya’s brother is missing critical types of insurance for his lifestyle and family situation, getting it should come before paying off a student loan or mortgage early. It’s always a good idea to review your insurance needs with a reputable agent or a financial advisor who can make sure you aren’t exposed to too much financial risk.

4. Set other financial goals

But what about other goals you might have, such as saving for a child’s education, starting a business, or buying a home? These are wonderful if you can afford them once you’ve accounted for your emergency savings, retirement, and insurance needs.

Make a list of your financial dreams, what they cost, and how much you can afford to spend on them each month. If they’re more important to you than paying off student loans or a mortgage early, then you should fund them. But if you’re more determined to become completely debt-free, go for it!

5. Consider your opportunity costs

Once you’ve hit the financial targets we’ve covered so far, and you have money left over, it’s time to consider the opportunity costs of using it to pay off your student loans or mortgage. Your opportunity cost is the potential gain you’d miss if you used your money for another purpose, such as investing it.

A couple of benefits of both student loans and mortgages is that they come with low interest rates and tax deductions, making them relatively inexpensive. That’s why other high-interest debts, such as credit cards, personal loans, and auto loans, should always be paid off first. Those debts cost more in interest and don’t come with any money-saving tax deductions.

Especially in today’s low interest rate environment, it’s possible to get a significantly higher return even with a reasonably conservative investment portfolio.

But many people overlook the ability to invest extra money and get a higher return. For instance, if you pay off the mortgage, you’d receive a 4% guaranteed return. But if you can get 6% on an investment portfolio, you may come out ahead.

Especially in today’s low-interest-rate environment, it’s possible to get a significantly higher return even with a reasonably conservative investment portfolio. The downside of investing extra money, instead of using it to pay down a student loan or mortgage, is that investment returns are not guaranteed.

If you decide an early payoff is right for you, keep reading. We’ll review several factors to help you know which type of loan to focus on first.

 

6. Compare your student loans and mortgage

Once you have only student loans and a mortgage and you’ve decided to prepay one of them, consider these factors.

The interest rates of your loans. As I mentioned, you may be eligible to claim a mortgage interest tax deduction and a student loan interest deduction. How much savings these deductions give you depends on your income and whether you use Schedule A to itemize deductions on your tax return. If you claim either type of deduction, it could reduce your after-tax interest rate by about 1%. The debt with the highest after-tax interest rate is typically the best one to pay off first.

The amounts you owe. If you owe significantly less on your student loans than your mortgage, eliminating the smaller debt first might feel great. Then you’d only have one debt left to pay off instead of two.

You have an interest-only adjustable-rate mortgage (ARM). With this type of mortgage, you’re only required to pay interest for a period (such as several months or up to several years). Then your monthly payments increase significantly based on market conditions. Even if your ARM interest rate is lower than your student loans, it could go up in the future. You may want to pay it down enough to refinance to a fixed-rate mortgage.

You have a loan cosigner. If you have a family member who cosigned your student loans or a spouse who cosigned your mortgage, they may influence which loan you tackle first. For instance, if eliminating a student loan cosigned by your parents would help improve their credit or overall financial situation, you might prioritize that debt.

You qualify for student loan forgiveness. If you have a federal loan that can be forgiven after a certain period (such as 10 or 20 years), prepaying it means you’ll have less forgiven. Paying more toward your mortgage would save you more.

Being completely debt-free is a terrific goal, but keeping inexpensive debt and investing your excess cash for higher returns can make you wealthier in the end.

As you can see, the decision to eliminate debt and in what order, isn’t clear-cut. Mortgages and student loans are some of the best types of debt to have—they allow you to build wealth by accumulating equity in a home, getting higher-paying jobs, and freeing up income you can save and invest.

In other words, if Maya’s brother uses his excess cash to prepay a low-rate mortgage or a student loan, it may do more harm than good. So, before you rush to prepay these types of debts, make sure there isn’t a better use for your money.

Being completely debt-free is a terrific goal, but keeping inexpensive debt and investing your excess cash for higher returns can make you wealthier in the end. Only you can decide whether paying off a mortgage or student loan is the right financial move for you.

Continue readingWhich Debts Should You Prepay First? A 6-Step Plan
How to Avoid Paying Taxes on a Bonus Check
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The satisfaction of receiving a year-end bonus may soon be tempered by the realization that income taxes will have to be paid on the extra money. Bonuses are treated as income and thus subject to taxation, but there are ways … Continue reading →

The post How to Avoid Paying Taxes on a Bonus Check appeared first on SmartAsset Blog.

Continue readingHow to Avoid Paying Taxes on a Bonus Check
10 COVID-19 Stimulus Benefits for the Self-Employed
By admin | |

Since the outbreak of the coronavirus pandemic in March 2020, life and business certainly have changed. If you’re self-employed full-time or earn business income on the side of a day job, you may be wondering what economic relief applies to you.  

Let's review what relief Congress passed to help self-employed Americans cope with financial challenges. I’ll review ten key stimulus benefits that apply to solopreneurs and small businesses.

If you're experiencing economic hardship due to the coronavirus, using some of these new regulations may be the ticket to managing your personal and business finances better.

10 ways the self-employed can get financial relief

The Coronavirus Aid, Relief, and Economic Security (CARES) Act became law on March 27 as the largest stimulus legislation in American history since the New Deal in the 1930s. Here are ten ways it provides relief for individual solopreneurs and small business owners.

1. Getting lower interest rates

On March 3, the central U.S. bank, also known as the Federal Reserve or Fed, made a surprising emergency interest rate cut of half a percentage point. That’s the largest single rate cut since the financial crisis of 2008. While this move wasn’t part of a coronavirus stimulus package, it was an aggressive cut meant to prepare the economy for problems the pandemic was expected to cause.

An economic recovery could take a few years, which likely means the Fed rate will stay near zero through 2023.

In mid-September, the Fed reiterated its promise to keep interest rates near zero until the economy improves and the unemployment rate declines. They indicated that a recovery could take a few years, which likely means the Fed rate stays near zero through 2023.

While savers never celebrate low interest rates, they're beneficial to borrowers. In general, the financing charge on variable-rate credit cards and lines of credit goes down in lockstep with interest rates. Carrying a balance on your personal and business credit cards may be slightly less expensive, depending on your card issuer and type. For instance, if your card’s annual percentage rate or APR is 20%, your adjusted rate could go down to 19.5%.

If you have a fixed-rate credit card, the APR doesn’t change no matter what happens in the economy or with federal interest rates. Also, note that if you pay off your balance in full each month, a credit card’s APR is irrelevant because you don’t pay interest on purchases.

2. Having more time to file taxes

Earlier this year, the due date for filing and paying 2019 federal taxes was postponed from April 15, 2020, to July 15, 2020. You didn't have to be sick or negatively impacted by COVID-19 to qualify for this federal tax delay. It applied to any person or business entity with taxes due on April 15, 2020.

If you missed the tax filing deadline, be sure to request an extension.

Most businesses make estimated tax payments each quarter. Those payment dates have shifted, too. The 2020 schedule gives you more time as follows:

  • The first quarter was due on July 15, 2020, which changed from April 15, 2020
  • The second quarter was due on July 15, 2020, which changed from April 15, 2020
  • The third quarter was due on September 15, 2020
  • The fourth quarter is due on January 15, 2021

Individuals and businesses can request an automatic extension to delay filing federal taxes. But it doesn’t give you more time to pay what you owe for 2019, only more time to submit your tax form—until October 15, 2020.

If you missed the tax filing deadline, be sure to request an extension. Individuals must file IRS Form 4868, and most incorporated businesses use IRS Form 7004.

However, depending on where you live, you may have to pay state income taxes, which have not been postponed. If you need a state tax filing extension, check with your state’s tax agency to determine what’s possible.

Taxes due on any date other than April 15, 2020—such as sales tax, payroll tax, or estate tax—don’t qualify for relief.

3. Getting more time to contribute to retirement accounts

You typically have until April 15 or the date of a tax extension to make traditional IRA or Roth IRA contributions for the prior year. But since the CARES Act postponed the federal tax filing deadline, you also have until July 15 or October 15, 2020 (if you requested an extension) to make IRA contributions for 2019.

However, this deadline doesn't apply to retirement accounts you may have with an employer, such as a 401(k). Nor does it apply to self-employed accounts, such as a solo 401(k) or SEP-IRA, which correspond to the calendar year.

4. Getting more time to contribute to an HSA

Like with an IRA, you typically have until April 15 or the date of a tax extension to make HSA contributions for the prior year. Under the CARES Act, you now have until July 15 or October 15, 2020, to make HSA contributions for 2019.

To qualify for an HSA, you must be covered by a qualifying high-deductible health plan. In early March, the IRS issued a notice that a high-deductible health plan may cover COVID-19 testing and treatment and telehealth services before meeting your deductible. And just as before the coronavirus, you can pay for medical testing and treatment using funds in your HSA.

5. Delaying tax on retirement withdrawals

While you typically must pay income tax on retirement account withdrawals that weren’t previously taxed, the good news is that for a period, you can delay or avoid tax altogether. The CARES Act gives you two options for withdrawals made in 2020:

  • Repay a hardship distribution within three years to your retirement account. You can replace the funds slowly or all at once, with no change to your annual contribution limit. If you take money out but return it within three years, it’s like you never took a distribution.
  • Pay taxes on a hardship distribution from your retirement account evenly over three years. If you can’t pay back your distribution, you can ease your tax burden by paying one-third of your liability for three years. 

Since withdrawing contributions from a Roth retirement account doesn’t trigger income taxes, it’s a good idea to tap a Roth before a traditional retirement account when you have the option.

6. Skipping early withdrawal penalties

Most retirement accounts impose a 10% early withdrawal penalty if you take make withdrawals before age 59.5. Under the CARES Act, if you have a coronavirus-related hardship, the penalty is waived.

Under the CARES Act, if you have a coronavirus-related hardship, the penalty is waived.

For instance, if you, your spouse, or a child gets diagnosed with COVID-19 or have financial challenges due to being laid off, quarantined, or closing a business, you qualify for this penalty exemption. You can withdraw up to $100,000 of your retirement account balance during 2020 without penalty. However, income taxes would still be due in most cases.

The no-penalty rule applies to workplace retirement plans, such as 401(k)s and 403(b)s. It also applies to IRAs, such as traditional IRAs, Roth IRAs, and SEP-IRAs.

Since you make after-tax contributions to Roth accounts, you can withdraw them at any time (which was also the case before the CARES Act). However, the earnings portion of a Roth is subject to income tax if you withdraw it before age 59.5.

7. Getting larger retirement plan loans

Some workplace retirement plans, such as 401(k)s and 403(b)s, permit loans. Typically, you can borrow 50% of your vested account balance up to $50,000 and repay it with interest over five years.

You can delay the repayment period for a retirement plan loan for up to one year.

For retirement plans that allow loans, the CARES Act doubles the limit to 100% of your vested balance in the plan up to $100,000. It applies to loans you take from your account until late September 2020, for coronavirus-related financial needs.

You can delay the repayment period for a retirement plan loan for up to one year. For example, if you have $20,000 vested in your 401(k), you could take a $20,000 loan on September 30, 2020, and delay the repayment term until September 30, 2021. You’d have payments stretched over five years, ending on September 30, 2026. Any amount not repaid by the deadline would be subject to tax and a 10 percent early withdrawal penalty.

Note that individual retirement accounts—such as traditional IRAs, Roth IRAs, and SEP-IRAs—don’t allow participants to take loans, only hardship distributions.

8. Suspending student loan payments.

Starting on March 13, 2020, most federal student loans went into automatic forbearance until September 30, 2020, due to the CARES Act. On August 8, the suspension of student loan payments was extended through December 31, 2020.

On August 8, the suspension of student loan payments was extended through December 31, 2020.

The suspension covers the following types of loans:

  • Direct Loans that are unsubsidized or subsidized
  • Direct PLUS Loans
  • Direct Consolidation Loans
  • Federal Family Education Loans (FFEL)
  • Federal Perkins Loans

Note that FFEL loans owned by a private lender or Perkins loans held by your education institution don’t qualify for automatic forbearance. However, you may have the option to consolidate them into a Direct Loan, which would be eligible for forbearance. Just make sure that once the suspension ends, your new consolidated interest rate wouldn’t rise significantly.

During forbearance, qualifying loans don’t accrue additional interest. Even if you have federal student loans in default because you haven’t made payments, zero percent interest applies during the suspension period.

Additionally, missed payments during the suspension don’t get reported to the credit bureaus and can’t hurt your credit. Qualifying payments you skip also count toward any federal loan repayment or forgiveness plan you’re enrolled in.

However, if you want to continue making student loan payments during the suspension period, you can. With zero percent interest, the amount you pay gets applied to your principal student loan balance, enabling you to get out of debt faster.

With zero percent interest, the amount you pay gets applied to your principal student loan balance, enabling you to get out of debt faster.

If you’re not sure what type of student loan you have or the pros and cons of consolidation, contact your loan servicer. Even if your student loans are with private lenders or schools, they may offer relief if you request it.

9. Having Paycheck Protection Program (PPP) loans forgiven

The PPP is part of the CARES Act, and it supports small businesses, organizations, and solopreneurs facing economic hardship created by the pandemic. The program began providing relief in early April 2020, and the application window ended in early August 2020.

Participating PPP lenders coordinated with the Small Business Administration (SBA) to offer loans to businesses in operation by February 15, 2020, with fewer than 500 employees. Loan amounts could be up to 2.5 times the average monthly payroll up to $10 million; however, annual salaries were capped at $100,000.

For a solopreneur, the maximum PPP loan was $20,833 if your 2019 net profit was at least $100,000. The calculation is: $100,000 / 12 months x 2.5 = $20,833.

When you spend at least 60% on payroll and 40% on rent, mortgage interest, and utilities, you can have those amounts forgiven from repayment. Payroll includes payments to yourself, but you can’t cover benefit costs, such as retirement contributions, or payments to independent contractors.

In other words, a solopreneur could have received a PPP loan for up to $20,833, paid the entire amount to themselves, and not repaid it by having the load forgiven. Using a PPP loan for qualifying expenses turns it into a grant.

The best part about PPP loan forgiveness is that it won’t qualify as federal taxable income. Some states that charge income tax have indicated that they won’t tax forgiven amounts.

However, if you have employees, the PPP forgiveness calculations and requirements are more complex. For example, you must maintain reasonable salaries and wages. If you decrease them by more than 25% for any employee (including yourself) who made less than $100,000 in 2019, your forgiveness amount will be reduced. 

PPP loan forgiveness also depends on keeping any full-time employees on your payroll. But if you had employees who left your company voluntarily, requested a cut in hours, or got fired for cause during the pandemic, your loan forgiveness amount won’t be reduced for those situations.

The best part about PPP loan forgiveness is that it won’t qualify as federal taxable income. Some states that charge income tax have indicated that they won’t tax forgiven amounts.

However, not all states have issued their rules on taxing PPP forgiveness. So be sure to get guidance if you live in a state with income tax.

You must complete a PPP Loan Forgiveness Application and get approved by your lender to qualify for forgiveness. The paperwork should come from your lender, or you can download it from the SBA website at SBA.gov. Most PPP borrowers have from six months after loan disbursement or until the end of 2020 to spend the funds. 

The forgiveness application explains what documents you must include, and they vary depending on whether you have employees. Once you submit your paperwork, your lender has 60 days to decide how much of your PPP loan can be forgiven.

If some or all of a PPP loan isn't forgiven, you typically must repay it within five years at a 1 percent fixed interest rate. You don't have to start making payments for ten months after loan disbursement, but interest will accrue during a deferral period.

10. Getting SBA loans

In addition to PPP loans, the Small Business Administration (SBA) offers several loans for businesses and solopreneurs facing economic hardship caused by a disaster, including the COVID-19 pandemic.

  • Economic Injury Disaster Loan (EIDL) can be up to $2 million and repaid over 30 years at an interest rate of 3.75 percent. You can use these funds for payroll and other operating expenses.
  • SBA Express Bridge Loans gives borrowers up to $25,000 for help overcoming a temporary loss of revenue. However, you must have an existing relationship with an SBA Express lender. 
  • SBA Debt Relief is a program that helps you make payments on existing SBA loans for up to six months.

Depending on your state, you may qualify for unemployment assistance, which allows self-employed people, who typically are ineligible for unemployment benefits to get them for a period.

This isn’t a complete list of all the economic relief available for small businesses and solopreneurs. There are federal tax initiatives, funds from local and state governments, and help from private organizations that you may find by doing a search online.

How to manage money in uncertain times

When it comes to surviving uncertainty, such as how COVID-19 will affect the economy, those who have emergency savings will feel much less financial stress than those who don’t. That’s why it’s essential to maintain a cash reserve of at least three to six months’ worth of living expenses in an FDIC-insured bank savings account.

If you don’t need to dip into your emergency fund, continue shoring it up when possible. If you don’t have a cash reserve, accumulate savings by cutting non-essential expenses, and even temporarily pausing contributions to retirement accounts. That’s a better option than succumbing to panic and tapping your retirement funds early.

If you don’t need to dip into your emergency fund, continue shoring it up when possible.

If you find yourself in a cash crunch, contact your creditors before dipping into any retirement accounts you have. Many lenders will be willing to work with you to suspend payments or modify existing loan terms temporarily.

RELATED: How to Reduce Money Anxiety—Compassionate Advice from a Finance Pro

My new book, Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers, covers many strategies to earn more, manage variable income, and create an automatic money system so you can strengthen your financial future. It’s a great resource if you’re thinking about earning side income or have already started a business.

Many economic factors that affect your personal and business finances aren’t under your control. Instead of worrying, look around, and figure out how you can create more income or cut unnecessary expenses. Working on tasks that you can control gives you more clarity and helps manage stress in uncertain times.

Continue reading10 COVID-19 Stimulus Benefits for the Self-Employed