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High Yield Savings Account
Apparently there's a TikTok video going around stating that the Stimulus Checks the government is sending out for the Economic Impact Payments from the CARES Act, have to be paid back on next years taxes. Here's why this is completely false, and all it takes is a little math and understanding of what a Tax Credit is to debunk this notion.
The one truthful thing the guy mentions in his video, is that the Stimulus Check is an Advance on a Tax Credit on your 2020 tax return.
What Is An Advance?
What is an advance? An advance is when you receive something before you were originally scheduled to receive it. Typically you may hear this in regards to maybe an employer or a bank which will give you your "paycheck" a week earlier than you normally would have received it. Typically banks and other businesses who provide this service will charge you a flat fee or a percentage of the amount that you want to advance. But what they are giving you is what you are already going to receive anyway! So when you receive what you were going to receive anyway, it is then your job to "pay back" what you borrowed.
I believe this is why the maker of the viral TikTok video confused their statement, either intentionally or unintentionally, and stated that you will have to pay back the money next year. But this is false.
What is a Tax Credit?
Next let's talk about the definition of a Tax Credit. A Tax Credit is a dollar amount used to reduce your tax bill as a whole, or provide you with a refund if it is a refundable tax credit. This is different from a Tax Deduction, which reduces your taxable income, not your actual tax bill dollar for dollar. So let's break this down.
Let's say you should have paid $10K in taxes, but instead you only paid $8K in taxes. This would mean that you owe the IRS $2K in taxes, so you would have a tax bill. However let's also state that you have a $2K tax credit. Since Tax Credits are dollar for dollar credits towards your tax bill, this would completely wipe out your tax bill and you owe the IRS nothing.
However let's flip it, and say that you paid $12K, only owed $10K in taxes, and now you have an overpayment of $2K. This means that the IRS owes you a $2K refund, because you paid more in taxes than you really needed to. As a reminder...this is the only way you receive a REFUND, that's why it's called a refund! You overpaid! But, since you also have a $2K REFUNDABLE Tax Credit, now the IRS owes you $4K. $2K + $2K = $4K
Now that you are clear on how a Refundable Tax Credit works, let's now look at the Stimulus Check, which is being provided as an advance tax credit, on your 2020 taxes.
In example 1, you owed $2K in taxes, but because you had a $2K tax credit, your tax bill was cut to zero. Now let's add an additional $2K tax credit for the coronavirus stimulus check. Since this is a refundable tax credit, the IRS now owes you $2K! Doesn't that sound awesome? But wait...the IRS already gave you the $2K in April of 2020, so when you file your 2020 taxes in early 2021, you won't actually get the additional $2K in your pocket at that time...you've probably already spent it! This means that your tax bill stays the same as it would have been without the stimulus, which was ZERO!
It is the same case in example 2. Remember in example 2 the taxpayer paid $2K more than they should have paid in the year 2020. Now because of the $2K stimulus check, they are now owed $4K since the stimulus check is a refundable tax credit! Wrong! Why? Because they already gave you the $2K check in April of 2020, which means that your tax refund stays the same at $2K!
If You Didn't Receive Stimulus...
Now, where people will likely bring up that there's an issue, while others will think that they received a larger refund once they file taxes in 2021 is if you were a person who worked less than you typically would have if not for the coronavirus pandemic. Your taxes may look significantly different than it normally would, but the reason won't be because of the advance tax credit you received via the Stimulus Check. If you don't receive an economic impact payment now based on your 2018/2019 taxes, and you end up qualifying in 2021 due to lower income once you submit your 2020 taxes, then you would see a difference in your actual tax return. Since you didn't receive the stimulus check in 2020, the tax credit you receive once you file your 2020 taxes will be impacted by the new tax credit!
I hope this was helpful in debunking the fake news from the TikTok video which went viral. I'm sure there are similar videos out from multiple people, but I wanted to make sure that people understand what is really going on with these stimulus checks, and that any differences in your taxes when filed next year won't be due to the coronavirus stimulus check if you already received payment.
The Coronavirus is making a global impact. What we thought of as a virus half way across the globe, back in late 2019 and early 2020, has now spread to the United States, and cases are popping up in nearly every country in the world. It is officially a pandemic! This is not only effecting the health of people around the globe, but the economy, and thus our personal finances.
As Congress and the President passed the CARES Act, providing its citizens with the Economic Impact Payment based on your income eligibility, you now have a good problem to figure out. How to spend your coronavirus stimulus check! Here are a few ideas, in order of importance, depending on your personal financial situation.
Pay Your Bills
The first and most obvious thing you may need to spend this money on are your bills. If you lost your job, were furloughed, currently seeing a reduction in hours, or think there is a chance one of those 3 will occur in the next couple of months, then you should use these funds for your essential needs. Food, housing, and transportation. For some this stimulus will be exactly what they need to make it for another month, while for others it will not be enough to survive another month. If the latter is the case for you, this is a great time to reevaluate your current expenses. Cut out any non-essential bills you have, or find ways to reduce the costs of things that are essential. Based on several articles I've read, the percentage of Americans living paycheck to paycheck is between 50%-75% for those who make under $50K per year. This means that missing just one pay period, for any reason, will setback over half of Americans financially. For those who make over $150K it's not much better, about 25% of these higher income individuals are also living paycheck to paycheck. So we know that higher income is not the only answer to resolving financial concerns, even if it is the largest factor. You still have to control your spending and save money!
Which brings us to the next option. Create an Emergency Fund! If there's any uncertainty with your current employment situation, then you may want to save this money instead if you don't already have an emergency fund. Or even if you already have one, use this money to make it larger. Your emergency fund should not be your only savings. An emergency fund is the foundation of your savings, meaning theoretically you should have additional savings outside of this fund. If you don't already have one, and you don't need to use your stimulus for your current expenses, use this check to jump start your emergency fund. Then work towards creating 3-6 months of reserves.
Contribute to your Retirement
If you receive a Coronavirus Stimulus Check, and you don't need to use it for essentials, you could technically use this towards your HSA or IRA. In fact, I would lean towards using it for your HSA if you have not already maxed it out, and of course assuming you have a High Deductible Health Plan already. This way if you need to use the funds for potential health reasons, due to Coronavirus or otherwise, the funds will be available for withdrawal or to make payments to your healthcare provider.
Most people know April 15th as typically the last day you can file taxes without being penalized. Well this year Tax Day is being postponed 90 days, so the new date is July 15th. Along with this date is also the last day you can contribute to an IRA or HSA to be claimed on your taxes for the prior year! HSA and Traditional IRA contributions are tax deductible, so this could also be a way to help lower your taxable income, thus lowering your tax bill or perhaps increasing your refund if you overpaid! You can also contribute to a Roth IRA, although you won't receive any tax reduction benefits for doing so, you are still eligible to use this additional time. With a Roth IRA your tax benefit will come in retirement, as you won't be required to pay taxes on your Roth IRA withdrawals. So if you don't have any specific thing you need to use the stimulus check for, use it to boost your retirement accounts and take advantage of the current drop in the market.
Start a Business
If you're currently not working either due to being fired or furloughed, now is a great time to start the business you've always wanted to start. Or maybe just start a business that you can afford to start with the $1200 or more you receive from the Stimulus. Many of you may think this is not a lot of money to start, but there are many businesses that either do not require any capital at all, or that you can get started with as little as $100. In fact there's a great book called the $100 Startup by Chris Guillebeau, and you can use your stimulus check to purchase the book to gather some ideas. Or use your local library and/or the Libby App to access the book for free! You can start a website with a free trial, you can start a food delivery service with pre-orders, you can start a YouTube channel, a podcast, or many other things for free or definitely less than $1200. The key is to get started, and use these funds wisely to jumpstart the growth of your side hustle to turn it into a small business. Use your time and money wisely, especially if you find yourself currently with more time than money. There are a lot of great resources whether on YouTube, Podcasts, or via books at your local library or via apps like Libby.
Last but not least, you should spend your Stimulus Check. While this is the last option, for many of you it will be the first option, and it is also the option the government expects you to use. Their expectation is that most Americans will spend their money, by choice or by force since many will need to use it for their essentials. But for those who don't need it for their essentials, already have an emergency fund, have already maxed out their retirement, and already have additional streams of income, then spending it may actually be a good idea. There are many businesses, small and large, which actually need you to go out and spend your stimulus check so that they can stay in business. Personally I would lean towards supporting small businesses when you get the chance. When will that chance occur? Who knows, because many non-essential businesses are currently closed or have modified the way you can interact with them, or perhaps if this stimulus isn't enough, they may never reopen their doors again. You can also spend it on people you know are in need, as spending the money doesn't just mean buying things for yourself. Take the time to help someone in need, or donate to an organization who is helping those in need.
What would you do if you had extra cash trickling in every month, or every quarter? You could buy more stuff! Give gifts to your family and friends! Let your kids spend it! Put it into a high yield savings account! Invest it! Or...use it to pay off DEBT! If all of these options are possibilities for you, then paying off debt is your top priority. Did you know that Debt is just Investing backwards? The same way investing helps your money to grow by using compound interest, compound interest also helps your debt grow...just not in the direction you would like! Think of it as Negative Compound Interest. This interest is also a stronger force than the S&P 500 or Total Stock Market. Over the past 50 or so years, the Total Stock Market and S&P 500 have averaged around an 8% to 10% gain per year. Credit Card Debt however, currently has an average interest rate of over 17%. If you have debt with interest rates that are higher than the average gains in the stock market, then you need to focus on paying off these debts. This doesn't mean you can't use credit cards or invest, however! Good news!
A great way to start earning extra cash without working a side hustle, getting a raise, or changing jobs, is to earn Cash Back on your everyday purchases. The BEST way to use Cash Back is to pay off debt, which I would highly recommend if you have high interest Credit Card Debt or Student Loan Debt. When you use it to pay back debts, it is just like getting an immediate return on your "investment". Especially with credit cards, considering the average interest rate on a credit card is around 17% . The stock market over its history has averaged about 8 to 10%, so if you do have Credit Card debt, it doesn't mean you have to completely stop using them. Here's what I mean...
Credit Cards Are A Strong Foundation
When thinking of getting started with investing in the stock market, there is a lot of initial fear for some.
Stock Back Rewards?
Top 7 Cash Back Apps You Should Install Now! The Best Cash Back Rewards and Stock Back Rewards. Rewards Stacking 101
Before you swipe your card again, read this post! Better yet, before you spend any money, read this blog post. Sooner or later we all have to spend money somewhere. Whether it is to buy groceries, pay our phone bill's, light bill, furniture, gas for our car, maintenance of our car, eating out, new mobile phones and laptops etc... Almost every day we are spending money either in-store, through an app on our smartphone, or on a computer via a web browser like Chrome, Safari, FireFox, or Internet Explorer. Well why not get rewarded and get paid to spend money! If you're really pressed for time, here's my Top 7 of the Best Cash Back Apps. Use my referral links to receive a bonus for signing up. Otherwise keep reading for more details.
The Best Cash Back Apps
Rankings updated 12/24
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2) Bumped App (Waitlist)
1) Bits of Stock App (Waitlist)
Social Finance is really putting themselves out there now! The Financial Services start-up, known as SoFi for short, just paid big bucks to put their name on the most expensive NFL stadium ever built! That stadium is the home of the Los Angeles Rams and Los Angeles Chargers. It is the only private company with its name on ANY stadium of a sports team. They are really stepping their marketing game up to promote the many financial products they have released this year.
Who is SoFi?
SoFi is a Financial Services company who provides many services. The CEO Anthony Noto is the former CFO of the NFL, former COO of Twitter, and head of Twitter Ventures. Given his background its not surprising for him to spark a deal like this with the NFL! SoFi started out providing Student Loans and Student Loan Refinancing, and have recently expanded their available financial products to other loan types including Mortgage Loans, as well as Insurance. The products which interest me particularly is the Cash Management Account and Investment Account made available in the past year.
Let's first start off with a disclaimer. I am not a tax professional, and I do not provide tax, legal, or accounting advice. Readers should consult their tax advisors! There...I said it!
However, I thought this would be a fun math experiment. Is it possible for a middle class family of 4 to optimize their federal tax to the point where they won't owe anything at the end of the year? I think there are many ways to do this if you plan correctly! In the past I've used my income from the previous year, plus making adjustments to my W-4 withholding to try and approximate how much tax I will owe at the end of the year, so that I can get my tax bill or perhaps a refund that is as close to ZERO as possible!
BIG TAX REFUNDS & BIG TAX BILLS ARE FOR SUCKERS
First let's discuss why getting a huge refund at the end of the year is not "The Move" at all. When you receive a refund, this means that you've OVER PAID what you OWED in taxes for that year. You're essentially providing the government with an Interest Free Loan! When is the last time someone...anyone, especially an institution given you an interest fee loan? For 99% of us that answer is never! The closest you'll get is a credit card balance transfer, and most charge you a fee upfront, with no interest for a certain time period. Typically 6-12 months. After this time period, if you haven't paid off your card, you will be charged interest for the remaining balance as if you were being charged interest the whole time period. Banks are in the business of making money, so a loan is a means of making money off of your need to access cash.When you pay taxes, you are providing cash for the government to take care of the country or states needs. Now it may not be as efficient as we would like it to be, but that is its purpose.
Let's start with a rough example: You or your family unit provides the government with $1,000 of tax revenue each month, which adds up to $12,000 total at the end of the year. Of that $12,000, let's say you really only owed $9,600. That equals $2,400 at the end of year. Unfortunately that money had no opportunity to compound in order to help your money grow in a savings account or in investments. If instead, you could figure out a formula where you pay the exact amount of taxes you will owe, after taking into account Tax Deductions and Tax Credits, then you could put that money in a savings account or invest it throughout the course of the year. Let's assume you are a tax genius, or know one, and you were able to pay exactly $9,600 throughout the course of the year. What would the $2,400 turn into?
Creating a Budget is the first step into getting your finances in order. It opens your eyes to where your money is and isn't going, and forces you to make a change so that 10 minus 10 does not equal negative 5 (debt and interest on debt).
Not creating a budget is kind of like avoiding asking your parents for permission to do something. You know they are going to say no, so you don't ask and you do it anyway. Then later on they find out you did it, and you get in trouble. You're now responsible for the act you previously committed, and now you have to pay for it in some form of a punishment or scolding. You may not receive it immediately, or they may let the incidents pile up before they act upon a punishment.
It's the same with creating a budget. If you write down your income and the bills you need to pay, you will visually realize you may not have enough money to buy everything you want. Then you mentally have to go against what you know you should not do: go out to eat, buy new clothes, buy that new shiny electronic device, continue paying for services you don't really use (looking at you gym membership!).
For some people that's a harsh reality to face. I know it was for me. Especially after graduating from college and not having a job which paid enough for me to seriously think about paying my student loan debt.
Debt is the punishment (spanking or time out) you receive for not asking permission, and the additional interest you pay on debt are the residual memories you have of that punishment. You still feel the sting or disappointment from your parents, days/weeks/months/years later right? But the next question is, after feeling the sting, did you make a change to avoid feeling it again? Or did you follow the same path? Well maybe Mom might not realize what I did, or maybe she won't catch me this time. I'll be able to make up a good story in the Future if this ever comes up. Eventually, you will pay!
AJ Mobile Money
Husband | Father | YouTuber | Former ATLien
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