Alan Fraser Houston
Money Etiquette, Taxes

TurboTax Review: What to Know About the Online Tax Filing Service

Tax season is pretty much nobody’s idea of fun.

Fortunately, there’s a wide range of digital DIY tax filing services available to help you get your paperwork right and file your taxes online without spending your entire refund on an accountant.

In this TurboTax review, we’re covering everything you need to know about its online filing services and tax software and how it stacks up to its competitors.

TurboTax: How Does It Work?

Perhaps the best-known of the digital filing options, TurboTax is the tax-focused baby of Intuit, the same company behind Mint and Quickbooks.

As such, it’s not surprising that TurboTax has a dazzling array of financial tools to help you during tax time as well as year round, regardless of your tax situation.

TurboTax offers both totally DIY filing options as well as an upgraded suite of DIY filing with live online help. You can also purchase its tax preparation software on CD or by download, which can help you save even more money. You pay a one-time fee and get up to five included federal filings, though you’ll likely still need to pay to file your state tax return.

Here’s what the pricing tiers look like at TurboTax. (These prices are current as of January 2021 and are subject to change.)

Free Edition

The TurboTax Free Edition is appropriate for filers with simple tax returns. It covers W-2 income, the Earned Income Tax Credit (EIC) and child tax credits. True to its name, it’s free — but few peoples’ taxes are truly basic, and this tier doesn’t cover as many filers as competitors’ free options.

Cost: $0


The TurboTax Deluxe edition includes everything the Free Edition does, plus mortgage and property tax deductions, charitable donations, student loan interest, education expenses and 1099-MISC income — i.e. earnings of an independent contractor like a freelance writer or Uber driver.

If freelance work is your sole source of income, you’ll be better off using the TurboTax Self-Employed edition, which is described below.

Cost: $40 for federal filing, plus $40 per state


TurboTax Premier includes everything you get in Deluxe, as well as coverage for tax deductions and credits for things like stock market and cryptocurrency investments, rental property income and refinancing deductions. It also has a feature that lets you auto-import your investment income reports.

Cost: $70 for federal filing, plus $40 per state


TurboTax Self-Employed helps you prepare tax returns with personal and business income, so it’s a fit for freelancers, independent contractors and small business owners.

This edition includes a host of features specifically designed for freelancers, such as:

  • Help finding deductions specific to your line of work.
  • The ability to import 1099-MISC forms with a quick photo.
  • Free access to Quickbooks Self Employed.
  • Access to a year-round tax estimator after filing.

Cost: $90 for federal filing, plus $40 per state

Woman sits a table doing taxes.

TurboTax Live

For each of the products above, TurboTax lets you upgrade to TurboTax Live to get on-demand answers and a line-by-line review of your taxes by a tax expert — CPA or EA.

Cost: TurboTax Live comes in tiers similar to its DIY products:

  • Basic costs $0, including free state filing.
  • Deluxe costs $90, plus $50 for state filing.
  • Premier costs $140, plus $50 for state filing.
  • Self-Employed costs $170, plus $50 for state filing.
Weighing your options for filing taxes? We’ve got you covered with an overview of all the best tax software.


No matter which tier works best for you — and there’s an easy, clickable questionnaire that helps you figure out the right product based on your tax situation — all TurboTax customers get access to a wide range of tools, guarantees and features.

Audit Support Guarantee

TurboTax guarantees the accuracy of your taxes and stands behind that promise with its Audit Support Guarantee, which grants you free access to the Audit Support Center.

If you’re audited by the IRS, you can access the support center to get free, live, one-on-one guidance with a tax professional, as well as year-round answers to your questions and assistance on what to expect and how to prepare. This service is not, however, a replacement for legal advice.

Money-Back Maximum Refund Guarantee

TurboTax guarantees you’ll get the biggest refund possible. If you tally up a larger refund (or similar tax liability) with another tax preparation service, TurboTax will refund your fee (or pay you $30 if you used the Free edition).

Mobile Apps for Apple and Android

TurboTax lets you file from your smartphone or tablet with popular and highly rated apps for both Android and iOS. You can use the app to track charitable donations and deductible expenses throughout the year.

Refund Advance

If you need your money post-haste, TurboTax offers a refund advance of up to $3,000 of your expected federal tax refund with 0% interest and $0 loan fees. To be eligible, your expected refund must be at least $500.

If you’re eligible, you’ll get the funds within as little as three hours of the IRS accepting your tax return, loaded onto a Visa debit card. You’ll get the virtual card info, so you can spend online right away, and the physical card should come in the mail in five to 10 business days.

Once the IRS processes your federal return, your remaining refund amount will be loaded onto the same debit card. You don’t have the option to receive the rest of your refund in another form (e.g. direct deposited into your savings account).

Pay-With-My-Refund Options

TurboTax lets you pay your product and filing fees with your federal tax refund, meaning you never see an out-of-pocket cost for the service. There is, however, an additional fee for this option; most users report a charge of $39.99, though this price is subject to change.

Woman sits a table doing taxes.


To prepare and file your tax returns through TurboTax, you’ll pay a fee for the filing program or software, plus additional fees to file your state return. Here’s how that looks:

  • DIY online filing: Free to $90, depending on tier.
  • State filing fees: Additional $0 for free filing, $40 per state for paid DIY tiers, $50 per state for paid Live tiers.
  • TurboTax Live: Free to $170, depending on tier.

If you owe taxes after you file, you can pay through TurboTax’s payment processor via credit card or debit card for a convenience fee.

TurboTax also helps you pay via direct debit from your bank account for free. This is an option not all competitors offer; with other tax services, you’d have to go directly to the IRS to pay this way.

Claim innocent spouse with IRS after divorce
12/7/20 @ 5:46 PM
Never received my returns
9/15/20 @ 2:41 PM
Rachel Sciuto
I forgot
8/31/20 @ 2:12 PM
Chance Olwen
See more in Taxes or ask a money question

TurboTax: Pros and Cons

Now that we’ve laid out the basics of TurboTax’s features, what’s the verdict on its performance? Like all financial products and services, there are both pros and cons to using TurboTax.


  • Affordable: TurboTax’s tiers clock in at a lower price than similar tiers from competitors — though its free DIY service doesn’t cover as many filers as other options.
  • Ease of use: Filing with TurboTax is pretty comprehensive and user friendly, according to user reviews. Its technology simplifies the process — for example, you can automatically populate your tax forms by snapping photos of your W-2s.
  • Comprehensive: The company has a product available for just about every filer, no matter your income or tax situation, or how hands-on or hands-off you want to be.
  • Customer service: TurboTax offers lots of support, including links to extensive support topics as well as a community forum that lets you interact with other filers and tax experts in real time.


  • Overwhelming user experience: All those options mean TurboTax is super customizable. But sifting through them can feel kind of overwhelming. Its homepage tries to guide you to the right products based on your tax situation, but those can be confusing and make it tough to get an overview of products if you’re a comparison shopper.
  • Lack of transparency: Your total TurboTax fees aren’t totally clear until you actually go through the tax prep process. That could mean wasted time if you end up wanting to find a cheaper option.
  • No physical locations: TurboTax doesn’t offer in-person, brick-and-mortar offices like H&R Block. If face-to-face, personalized service is important to you, this isn’t your best option.

Who Is TurboTax Best For?

When it comes right down to it, most online tax preparation services are more alike than they are different.

TurboTax may be best for someone who wants custom tax help without going into an office and dealing with a live person. It’s also a good option if you’re looking for a truly fee-free line of advance tax credit so you can access your money ASAP.

Remember, you can always file for free, if you’re eligible, through the IRS portal. This service is available to filers who earned $72,000 or less (in 2020), and the page also links to free fillable forms for earners at all levels.

Still comparison shopping? Check out our reviews of H&R Block and TaxAct before you make a decision.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.


Identity Theft, Taxes

Should We Employ Our Own Kids? (and How Much to Pay Them)

My Brother Wax Mannequin, training the next generation of workforce last summer.

Way back in 2015, I had a nine year old boy. Even back then, I could see him showing some early flashes of adulthood and maturity, and it got me wondering about his future as it relates to money and freedom.

So I wrote a post called What I’m Teaching My Son About Money, which shared some ideas about how we can raise our next generation of kids to be happy masters of money rather than the stressed-out slaves that most people (even those with high incomes) are today. And now, four years later, some of my predictions and questions from that article are starting to come true, and I’m wondering what to do about it.

To me, the biggest question is this:

Where is the balance between giving your kids a helpful boost, and “helping” them so much that you distort their view of the world and create a generation of Whining Complainypants Adults?

Opinions on this subject can vary widely, and in fact even you and I might have rather different views. But hopefully we can at least agree that the whole thing sits on a spectrum, and that even that spectrum itself is slippery because every child and every upbringing is unique.

So let’s get onto the same page with an attractive and scientific-looking diagram.

Almost any parent would agree that the left side of the spectrum is a bad place for kids to be born. Because it affects not just their childhoods, but their entire lives. So we strive to provide a life that is further to the right, keeping our kids fueled with food, love, and opportunities.

But as with all human pursuits, we have a tendency to go too far and get into the “Too Easy” end of the spectrum. We may be smothering our kids with too much “help”, or perhaps compensating for being so busy with our fancypants careers that we don’t have much time to spend with them.

While this all feels like common sense, there’s also some biology behind it. Babies and young kids who experience a harsh environment during this critical part of development will tend to grow up more optimized for survival and street smarts, with lower levels of trust and a harder time blending in with a peaceful society*.

And on the more fortunate side of the divide, children raised in peace and security will optimize more for “book smarts” intelligence as well as being more trusting and less prone to violence. The entire apparatus of our brain will end up wired differently, based on the experiences we have in early childhood.

The problem for wealthy people is that the human brain is not wired to stop at “enough”, because enough has not been a big part of our shared history.

So we tend to overdo it when creating a comfortable life for our own kids, often justifying it with this exact sentence:

“We work hard, so we can give our kids some of the opportunities and the nice things that we didn’t have in our own childhood.”

It sounds noble and honorable on the surface, but be careful, because we can ratchet that same justification up far beyond any reasonable lifestyles without realizing we are just stoking our own egos or compensating for our own fears (and perhaps battling our peers/competitors in the Who’s-the-Best-Parent Competition on Facebook).

And then these kids respond by developing in a different way that can have its own downsides. Not understanding what it means to be poor. A lack of life’s most valuable skill – the skill of efficiency, optimization and reducing waste. And even a lack of life satisfaction and balance in later adulthood, because of a focus on easy consumption rather than the joy of creation.

So with such a slippery slope and those two pointy arrowheads to navigate, what’s the ideal strategy for us parents?

I don’t have all the answers, but one idea I have been interested in for years seems to have a lot of advantages: Hiring your children to work in your own small business.

Just think about it. You get to do all of these things and more:

  • help your kids earn their own money
  • teach them the value of hard work
  • have more excuses to spend time together solving problems – maybe even as they grow into adults
  • potentially cut the family’s total tax bill by transferring income from the high tax bracket of the parents, to the low (or zero) bracket of the kids.

Of course, there are also a few traps to watch out for in running a family business:

  • the job you give them might be better (or worse) than what they could get elsewhere, leading to a distorted view of what it really means to work for a living
  • if you don’t get along particularly well, tying your fates together even closer in a company will magnify any problems in your relationship
  • your kids might miss out on other, broader life experiences they could have had out there in the real world (like my own formative jobs in the gas stations and convenience stores of my small town, which are still the source of stories and laughs to this day.)

Still, the potential benefits clearly outweigh the risks to me, so the idea remains an exciting one in my mind.

Little MM and the Budding YouTube Project

I have been dabbling with this with my own son for several years – he helped me with the arduous task of mailing out over 1200 MMM T-shirts a few years ago and occasionally helps his mother in her soap production enterprises. His earnings have typically been on a per-shirt or per-soap basis

But things really took a step up this past January when he talked me into dusting off the neglected MMM YouTube Channel and actually starting to produce some shows together. Because we started with the good luck of a partially established audience and we have put some real effort into it (13 episodes over these first six months), it has taken off a little bit and we now have over 27,000 subscribers and the channel has earned about $1600 in YouTube ad revenue so far.

As a fun incentive, I offered at the beginning to pay him a flat (low) fee for editing and producing each episode, then split the income from this venture equally beyond that. So now, the little dude has made $800 on top of his base fees for the work.

If this continues, it could grow into a real income, which is quite exciting but also brings up some interesting tax questions. After all, right now he is a dependent for tax purposes, which means at least one of his parents get a tax deduction for raising him. But if he earns his own money, he might rise out of this dependence and even start owing taxes on his own. So is it worth it?

Hey, Let’s Ask my Accountant!

Outsourcing my taxes to someone younger and more enthusiastic about it than me has worked wonders.

To get better advice, I decided to run this by my own business and personal tax accountant, Chris Care who runs his own firm called Care CPA. We talked over the ideas of family businesses and employing a child in greater detail.

In summary, the results are better than I expected, which explains why people are so keen to hire their children.

Here’s my brief Q&A with him. Thanks for your help Chris!

MMM – So the first question is, what are the basic rules about employing one’s own child in a family business. My first instinct is that it sounds smart, because you are shifting income from parents in a potentially high tax bracket, to kids in a low tax bracket. So overall as a family, your tax bill falls.

But Is it a good idea? How old do they have to be? Any things to watch out for?

Chris Care: The biggest thing to watch out for is making sure the children are old enough to actually work. A lot of business owners want to pay their 1-year-old $15,000 a year for “modeling” by putting their picture on the company website. To me, this is a stretch.

You also want to make sure you’re paying them in accordance with the tasks they’re doing. If they are 12 years old and filing paperwork for you, or cleaning your office, or other administrative tasks, you probably can’t justify paying them $50 an hour. You should make sure there is a clear job description, and keep an accurate record of the number of hours worked and the tasks performed, just like any other employee does at their job

MMM –  What is the current child tax credit amount, and how would it phase out if he started making his own money? And does this scale up and down with the parents income as well?

Chris Care – Currently, the child tax credit is up to $2,000 per child, with up to $1,400 being refundable if the credit exceeds your tax amount.

In general, as long as you can claim the child as a dependent, and your income is below $400k if married filing jointly ($200k otherwise), you can claim the child tax credit no matter how much money your child makes. Above this income, the child tax credit phases out, but it is still not related to the child’s own income.

MMM –  Oh wow, I didn’t realize that. And at what level would he need to start incurring his own income taxes? And as an employer, would I be on the hook for stuff like quarterly tax payments, unemployment insurance, worker compensation, and so on? Could he be more like a contractor and avoid these complexities?

Chris Care – It’s unlikely you could classify your own son as a contractor. The IRS used to have a 20-factor test, but recently they have been narrowing and cracking down on this issue – more details here: Behavior, Financial, and Type of Relationship

Aside from that, you’d have to handle things in the standard employee way:

  •  tax withholding from every paycheck, submitted to the government as part of a standard payroll process. (MMM Note – even I have to do this as an employee of my own LLC, I use a provider called ADP and am evaluating a newer one called Gusto).
  • quarterly payroll taxes for social security and medicare
  • State unemployment insurance if applicable in your state
  • FUTA (A form of Federal Unemployment Tax)

Just like any other taxpayer, the child will need to file a federal tax return if their earned income is above the standard deduction ($12,000 for 2018, and $12,200 for 2019). Note that state filing thresholds are often much lower than federal thresholds – check with your own accountant!

MMM –  If a kid is living at home with no expenses, he might be wise to put as much of this into retirement accounts and otherwise defer taxes. If my company offered an employee 401k plan, could he put away the full $19,000 per year, or is there an even better option? Maybe his own tax-deferred college savings plan?

Chris Care – As with any other employee, the child can participate in the company’s retirement plan, as long as the plan is written to allow minors to participate. The contribution limits will depend on the type of retirement plan. In your example of a 401k, the child could defer the full employee amount ($19,000 in 2019) as long as wages were at least that amount. He would also get the employer match if your company established one.

College savings plans are an option, though whether or not he can open his own would be a question for your specific provider. Financial service firms tend to get a little hesitant opening accounts for minors. You could always open one, and he could contribute to it.

MMM Summary: Wow, this is much better than I had even hoped. In rough terms terms, it sounds like if I can pay my son $30k from my company’s income, I might save about $10k in marginal income taxes, while his resulting tax bill would be quite minimal.

Thus, it makes sense for me to start paying him as a real employee, rather than just paying all the taxes at my own marginal rate and keeping it in our own family spreadsheet, as I do now. 

Chris Care – Yes, there are some good opportunities for tax optimization by hiring kids.

In general, if you can justifiably pay your child a wage from the family business, it is an excellent way to lower the family’s tax burden, and give them a massive boost in retirement savings (since 401k contributions add up way faster than IRA contributions).

Also, by owning the business, you can administer your own 401k plan – which means you don’t have to wonder if your employer’s plan will allow for a mega backdoor Roth, since you can design it that way! Just keep in mind, that 401k plan is for all employees, so any attributes you establish for family members would also be there for non-family members that you may hire.

Another optimization: if you were a sole proprietorship, or a partnership where both partners are parents of the child being employed, the child’s wages would not even be subject to SS/Medicare taxes.

This means you could pay them the $12,000 standard deduction plus $19,000 401k deferral, with zero income tax, zero SS/Medicare taxes, and zero Federal Unemployment tax. They may still be subject to state income tax and state unemployment tax, but those would be relatively minor.

You can essentially shove $31k into a zero tax situation, from potentially a ~35% situation.
This means it may be worth operating the youtube channel as a separate company, and employing your son as a real employee…

MMM – hmmm, lots to consider! For now, YouTube is still only a few hundred bucks per month so we are not there yet. But it sounds like little MM’s future is bright, as long as he remains motivated to work hard and be creative and keep producing.

Which is a good general philosophy for any of us: keep some good hard work as part of every day, whether you’re ten or one hundred years old. Doing good work and producing good things tends to lead to a good life.

A Few More Thoughts and Disclaimers from Mr. Care:

  • In all of these answers, I have assumed the child is a true employee, where he receives a regular paycheck and a W-2 at the end of the year, and the company is a C Corp or S Corp.
  • As with all tax planning, tax credits, and personal situations, there are exceptions and limitations. So we’ve made some broad assumptions to answer these questions. For me to post an exhaustive list of these would take an entire blog post of its own. Always check with your tax professional, or make sure you understand the IRS guidance.
  • generational wealth / inequality / dynasties / buffett
  • effective auism

A Final Thought from MMM:

If all this sounds like wishful thinking to you because you don’t own your own business yet, I strongly encourage to start one! For the great majority of early retirees, having a small entrepreneurial pursuit is both a reassuring security blanket and a fascinating and fun way to explore life after the cubicles and commuting stage is over. The Joy Of Self Employment.

* This one of many interesting and sometimes untintuitive insights I got into Human nature when reading the rather excellent book Sapiens.



Retirement, Taxes

What You Should Do Now to Prepare for Tax Season 2020

tax season 2020

As of December 27, 2019, the IRS had received a whopping 155,798,000 tax returns during the year. A bit over 138 million of those were filed electronically, with almost 60 million electronic tax returns filed by individuals handling their own taxes. Whether you intend to be a self-preparer in 2021 or not, it’s a good idea to prepare for tax season sooner rather than later.

If you want to know how to prepare for tax season early, here are some steps you can take as early as November or December of the previous year:

  1. Gather important tax documents.
  2. Gather information about dependents.
  3. Double-check personal information with your employer.
  4. Plan ahead if you might owe taxes.
  5. Renew your ITIN if necessary.
  6. Start prepping your tax return.
  7. Do research on professional tax preparers.
  8. Finalize contributions for the year.
  9. Stay up-to-date on news from the IRS.

That’s a hefty list, but don’t worry. You can find more details about each of these ways to prepare for tax season 2020 below.

1. Gather Important Documents

You probably know that taxes require a great deal of paperwork. Get organized by starting to gather those documents. You might create a folder or basket where you can store documents until you’re ready to use them. Because many tax documents, including W2s and 1099s, might come electronically, create a digital folder where you can store those documents as well.

Common documents you might need to file your taxes include but aren’t limited to:

  • W2s from employers
  • 1099s from anyone who paid you miscellaneous, contract or other relevant funds
  • Documents showing medical, educational, child care or other expenses, especially if you’re itemizing
  • Statements regarding investments or mortgage interest payments
  • Receipts showing charitable donations
  • Receipts related to deductible expenses

2. Gather Information About Dependents

You’ll need the names and Social Security numbers of relevant dependents to include on your tax returns. If someone else can or might claim one of your dependents on their return, you need to know that. For example, if you’re divorced, it might be a good idea to work out which parent will claim a child or children for the 2020 tax year. You both can’t claim the same child for the same tax year.

3. Double-Check Personal Info With Your Employer

Filing your tax return as soon as possible after the IRS starts processing returns can be a way to get a refund sooner. But you’re often at the mercy of employers and others. Employers must send W2s by the last day of January each year.

Whether your employer sends your W2 early or waits until the last day, you could receive it even later than you would have if your employer doesn’t have the right address. To avoid this issue, check with HR to ensure all of your information is up-to-date.

This is actually a good exercise to practice with other businesses in December. Whether it’s a bank, your IRA provider or your child’s school, if someone is likely to send you tax documents, make sure they have your correct address.

4. Plan Ahead to Pay Taxes

According to the IRS, around $121 billion in taxes were delinquent for fiscal year 2019. One of the best ways to keep yourself out of the delinquent bucket when it comes to taxes is to plan ahead if you think you might owe. Here are a few tips for doing so:

  • Start a savings account to pay for your taxes. If you put money away starting as early as December, you can break a tax debt into smaller chunks and have enough to cover it by the April deadline.
  • Consider maximizing contributions and charitable donations to reduce your taxable income. This might lower the total amount you owe.
  • Estimate how much you might owe. Divide it by the number of weeks until the first week of April. Create a new personal budget that sets that amount aside if you can.
  • Consider consulting with a professional tax attorney or accountant to find out if you can reduce your tax burden in any other ways.

Note that you can file an extension for your return. That means you’ll have until October 15 to file your return. However, that extension doesn’t apply to your tax payment. If you wait until later to pay your taxes, you might still owe penalties and interest.

The IRS allows taxpayers to set up payment plans in some cases. If you’re current on all back taxes or have filed all required returns, you might be able to set up an installment agreement.

5. Renew Your ITIN

If you have an Individual Tax Identification Number (ITIN) used to file returns, you might need to renew it. According to the IRS, ITINs with 88 as the middle number expire December 31, 2020, and must be renewed.

Your ITIN is also set to expire at the end of the year if you haven’t used it on returns since 2016. The IRS further notes that ITINs with middle digits of 90 to 92 or 94 to 99 that were issued before 2013 and never renewed will also expire. If any of these situations apply to you, you’ll need to renew your ITIN.

6. Start Preparing Your Return

Want to get a serious head start and reduce the potential headache and stress of tax season? You can begin preparing your return today. If you use tax preparation software, you can enter as much information as you have right now. As you get information, you can quickly add it into the software. By the time you receive your last W2, you’ll have your taxes done.

While you’re getting ahead of the game, make sure you’re ready to receive a direct deposit of your refund when the time comes. You’ll need a valid bank account to do so.

7. Research Professional Tax Preparers

Don’t feel like you can handle the job on your own? That’s fine too. Consider using this extra time to research potential professionals or tax services that can help you file your taxes. If you choose a tax professional, make sure they have a valid Preparer Tax Identification Number, which indicates they’re authorized to file federal tax returns on behalf of others.

8. Finalize Contributions for the Year

December is a great time to finalize contributions to retirement plans for the year. You can deposit as much as $6,000 into your IRA for 2020. If you’re older than 50, that amount is $7,000 to allow for catch-up contributions. Those contributions can be tax deductible depending on your situation.

Other contributions you might want to look at include:

  • Health savings accounts, which have a maximum contribution limit of $3,500 for individuals and $7,000 for families.
  • 401(k) accounts, which have a maximum contribution limit of $19,500 for 2020 with an extra $6,500 in allowed catch-up contributions for those who are 50 or older.

9. Keep Up with IRS Announcements, Particularly About COVID-19

It’s unclear how COVID-19 may impact tax filing, refunds and payment deadlines in 2021. Make sure you stay up-to-date with the IRS’s news releases in this matter.

While you’re taking some time to prepare for the next tax season early, you might also want to give your financials a close look. If you’re not already keeping close tabs on your credit, now is as good a time as any to pull your reports to check them for accuracy. You can also sign up for a service such as ExtraCredit, which makes it easy to monitor your credit score and access numerous features to build, protect or use your credit.

Try ExtraCredit Today!

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Retirement, Taxes

Are Social Security Disability Benefits Taxable?

A disabled woman talks to her accountant about taxes.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 money. For most people, the answer is no. But there are some scenarios where you may have to pay taxes on Social Security disability benefits. It may also behoove you to consult with a trusted financial advisor as you navigate the complicated terrain of taxes on Social Security disability benefits.

What Is Social Security Disability?

The Social Security Disability Insurance program (SSDI) pays benefits to eligible people who have become disabled. To be considered eligible for Social Security disability benefits, you have to be “insured”, which means you worked long enough and recently enough to accumulate benefits based on your Social Security taxes paid.

You also have to meet the Social Security Administration’s definition of disabled. To be considered disabled, it would have to be determined that you can no longer do the kind of work you did before you became disabled and that you won’t be able to do any other type of work because of your disability. Your disability must have lasted at least 12 months or be expected to last 12 months.

Social Security disability benefits are different from Supplemental Security Income (SSI) and Social Security retirement benefits. SSI benefits are paid to people who are aged, blind or disabled and have little to no income. These benefits are designed to help meet basic needs for living expenses. Social Security retirement benefits are paid out based on your past earnings, regardless of disability status.

Supplemental Security Income generally isn’t taxed as it’s a needs-based benefit. The people who receive these benefits typically don’t have enough income to require tax reporting. Social Security retirement benefits, on the other hand, can be taxable if you’re working part-time or full-time while receiving benefits.

Is Social Security Disability Taxable? 

This is an important question to ask if you receive Social Security disability benefits and the short answer is, it depends. For the majority of people, these benefits are not taxable. But your Social Security disability benefits may be taxable if you’re also receiving income from another source or your spouse is receiving income.

The good news is, there are thresholds you have to reach before your Social Security disability benefits become taxable.

When Is Social Security Disability Taxable? 

A senior's tax return

The IRS says that Social Security disability benefits may be taxable if one-half of your benefits, plus all your other income, is greater than a certain amount which is based on your tax filing status. Even if you’re not working at all because of a disability, other income you’d have to report includes unearned income such as tax-exempt interest and dividends.

If you’re married and file a joint return, you also have to include your spouse’s income to determine whether any part of your Social Security disability benefits are taxable. This true even if your spouse isn’t receiving any benefits from Social Security.

The IRS sets the threshold for taxing Social Security disability benefits at the following limits:

  • $25,000 if you’re single, head of household, or qualifying widow(er),
  • $25,000 if you’re married filing separately and lived apart from your spouse for the entire year,
  • $32,000 if you’re married filing jointly,
  • $0 if you’re married filing separately and lived with your spouse at any time during the tax year.

This means that if you’re married and file a joint return, you can report a combined income of up to $32,000 before you’d have to pay taxes on Social Security disability benefits. There are two different tax rates the IRS can apply, based on how much income you report and your filing status.

If you’re single and file an individual return, you’d pay taxes on:

  • Up to 50% of your benefits if your income is between $25,000 and $34,000
  • Up to 85% of your benefits if your income is more than $34,000

If you’re married and file a joint return, you’d pay taxes on:

  • Up to 50% of your benefits if your combined income is between $32,000 and $44,000
  • Up to 85% of your benefits if your combined income is more than $44,000

In other words, the more income you have individually or as a married couple, the more likely you are to have to pay taxes on Social Security disability benefits. In terms of the actual tax rate that’s applied to these benefits, the IRS uses your marginal tax rate. So you wouldn’t be paying a 50% or 85% tax rate; instead, you’d pay your ordinary income tax rate based on whatever tax bracket you land in.

It’s also important to note that you could be temporarily pushed into a higher tax bracket if you receive Social Security disability back payments. These back payments can be paid to you in a lump sum to cover periods where you were disabled but were still waiting for your benefits application to be approved. The good news is you can apply some of those benefits to past years’ tax returns retroactively to spread out your tax liability. You’d need to file an amended return to do so.

Is Social Security Disability Taxable at the State Level?

Besides owing federal income taxes on Social Security disability benefits, it’s possible that you could owe state taxes as well. As of 2020, 12 states imposed some form of taxation on Social Security disability benefits, though they each apply the tax differently.

Nebraska and Utah, for example, follow federal government taxation rules. But other states allow for certain exemptions or exclusions and at least one state, West Virginia, plans to phase out Social Security benefits taxation by 2022. If you’re concerned about how much you might have to pay in state taxes on Social Security benefits, it can help to read up on the taxation rules for where you live.

How to Report Taxes on Social Security Disability Benefits

If you received Social Security disability benefits, those are reported in Box 5 of Form SSA-1099, Social Security Benefit Statement. This is mailed out to you each year by the Social Security Administration.

You report the amount listed in Box 5 on that form on line 5a of your Form 1040 or Form 1040-SR, depending on which one you file. The taxable part of your Social Security disability benefits is reported on line 5b of either form.

The Bottom Line

A disabled man in a wheelchairSocial Security disability benefits aren’t automatically taxable, but you may owe taxes on them if you pass the income thresholds. If you’re worried about how receiving disability benefits while reporting other income might affect your tax bill, talking to a tax professional can help. They may be able to come up with strategies or solutions to minimize the amount of taxes you’ll end up owing.

Tips on Taxes

  • Consider talking to a financial advisor as well about how to make the most of your Social Security disability benefits and other income. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool can help. By answering a few simple questions you can get personalized recommendations for professional advisors in your local area in minutes. If you’re ready, get started now.
  • While you don’t have to reach a specific age to apply for Social Security disability benefits or Supplemental Security Income benefits, there is a minimum age for claiming Social Security retirement benefits. A Social Security calculator can help you decide when you should retire.

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Home Improvement, Taxes

7 Creative and Quick Dining Room Updates

With so many dining rooms being converted into part of the living room or kitchen these days, dining room design has kind of fallen by the wayside. But if you’re one of the lucky homeowners to have hung on to a formal dining space, you’ve got an opportunity to make some amazing modern updates. Here are 7 affordable ways to breathe new life into an old dining room:

#1 Perk things up with paint.
Are your dining room walls still the same color they were when you moved into your house 10 years ago? If so, there’s a good chance the color’s a little past its prime. In fact, it may also be doing an injustice to your furniture and the updates you’ve made in adjoining rooms as well. Refresh the walls with a paint shade that makes you feel comfortable and cozy. The room will reflect that feeling.

#2 Modernize the lighting.
Are outdated chandeliers and lamps gathering dust in your dining room? Consider sending them packing and installing some recessed lighting and pendants in their place. Pendant lights, in particular, come in a wide variety of styles and colors sure to add some new pizzazz to your space.

#3 Repurpose another room.
If your dining room is located in an undesirable space — a cramped corner of the house away from the kitchen, for example — pick a new place for your table and chairs. Put them in the kitchen, if you have the the space. Or, place the dining table somewhere right in your living room, where there’s easy access to the TV and stereo. You should always feel comfortable during a meal, and being confined to an area you don’t enjoy doesn’t contribute to that feeling.

#4 Add some visual appeal.
Visual appeal doesn’t stop at paint and lighting. It’s also important to consider how wall decor may increase the interest and comfort of the room. Blank walls may make it easy to zone out and focus on your meals, but your guests will surely enjoy looking at something a little more interesting. Depending on your budget and the size of your dining room, consider hanging potted plants and colorful pieces of art. Just be sure to balance wall decor with other elements in the room so your space doesn’t feel like it’s cluttered with stuff.

#5 Throw in a rug.
One of the worst sounds to hear is a chair scratching against the floor as you go to get up from the dining table. So fix the issue. Add a rug underneath the table and chairs to make things soft and cozy. Choose a rug that isn’t too thick with fibers. Otherwise, your chairs can get stuck and twisted. Of course, you’ll also want to make sure that the style and color of your rug complement the rest of the room.

#6 Use dividers.
Many newer homes combine kitchen and dining spaces. If you want to create a dedicated dining space, think about incorporating a room divider. It’s much cheaper than installing a wall — and you can add shelves, plants or a sliding door to further divide the two spaces. Plus, the flexibility of the divider allows to revert back to the bigger space any time you like.

#7 Build in.
How’s your dining room designed? Do you have a table that sits in the middle with four chairs around it? If you want to make the room more functional — and create more storage in the process — think about ditching the clunky furniture and opting instead for built-ins like bench seating, china cabinets and buffets. A professional can create custom built-ins to suit any style.

The post 7 Creative and Quick Dining Room Updates first appeared on Century 21®.