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The Smartest Way to Use Unemployment Benefits

Prioritize your necessities above debt while you’re living on an unemployment budget

Job loss might throw your money into a loop even if you’re a disciplined budgeter. You have to re-evaluate your expenditures and your priorities, and this may be particularly tough since losing a job frequently takes a huge emotional toll. Expanded unemployment benefits have been a lifeline for millions of Americans during the COVID-19 outbreak.

There’s no one-size-fits-all strategy for living on an unemployment budget. But there are some practical tactics for how to spend your benefits, how to manage your budget, and which bills you should prioritize.

How Unemployment Benefits Work

The U.S. Department of Labor manages the unemployment insurance system, but each state runs its own program, sets its own regulations, and provides most of the funds. A normal state unemployment program will replace around half your usual pay for up to 26 weeks during ordinary times, although benefits may vary substantially.
Note
Average weekly unemployment benefits were $387 in February 2020 before job losses became widespread owing to COVID-19. Mississippi gave the lowest weekly benefit at $215, while Massachusetts paid the most at $550 per week.
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides $600 a week in federal cash for jobless workers on top of their usual state benefits. About 76% of jobless people were entitled to make more from unemployment than they had earned from the jobs they'd lost. This weekly supplement terminated in July 2020.

A relief package to aid with unemployment was enacted in December 2020.2 It supplemented normal state benefits with an additional $300 a week, plus $100 for select self-employed workers, and it lasted until March 14, 2021.

The American Rescue Plan, enacted in March, granted an additional $300 a week until September 6, 2021.

First Plan for Taxes

Your jobless benefits are taxable income for federal tax purposes, however this provision was suspended in 2020 for unemployment benefits up to $10,200 for persons with adjusted gross incomes (AGIs) of not more than $150,000.5 You must disclose any unemployment compensation when you complete your tax return going forward. You may decide to have 10% of your benefits withheld for taxes by filling out Internal Revenue Service (IRS) Form W-4V, although this is voluntary. It won't happen until you request it.

There’s no assurance that 10% will satisfy your tax bill, and you don't have the option of having extra money withheld.6 Thirty-five states also tax unemployment payments.
Note
Your benefits are not subject to the payroll taxes that finance Social Security and Medicare.
It would make sense to have tax deducted from your benefits if this would still leave you with enough money to meet your essential costs and necessities. This would save you some tax burden down the way. But not having taxes withheld is typically the smarter decision if you're struggling to pay your debts, according to Leslie Tayne, a New York-based debt settlement attorney and founder of the Tayne Law Group.

"If receiving untaxed unemployment benefits will prevent you from choosing a predatory loan or having to borrow money with excessive interest, it might make sense to avoid withholding and [to owe] money when filing your taxes," Tayne added.

It's crucial that you submit a tax return nevertheless to prevent further fines and interest, even if you can't afford to pay what you owe at tax time.
Note
The IRS provides numerous payment plan changes and tax payback benefits for persons who owe taxes. It may also eliminate payment plan setup costs if your income is equal to or less than 250% of the federal poverty threshold.

Adjust Your Spending

Consider which costs you need to survive while building an unemployment budget. Tayne proposes ordering spending from the greatest to the least significant. "Groceries, mortgage and rent payments, utilities, and health insurance are essential," she stated. "If you've been paying down credit card debt and face unemployment, shift the focus to more important bills and pay the minimum on credit cards, if needed."

Take a serious look at the items that show up on the "least important" end of your list and examine what you might reduce, such a gym membership, subscription, or streaming service. You may be able to discover methods to minimize prices even on essential needs, notably on grocery.

"Consider shopping at low-cost grocery stores in your area, where available, such as Lidl and Aldi," Tayne added. "Food staples are often much cheaper there compared to regular grocery stores."

Other possibilities during bad times include receiving goods from a food pantry or sharing meals with relatives and friends. You may also be able to save on prescriptions by switching to generics or utilizing a prescription discount card.

Prioritize Your Rent

It's crucial to prioritize rent in your jobless budget. A countrywide prohibition on evictions was extended by the Centers for Disease Control and Prevention (CDC) to September 30, 2021, however the U.S. Supreme Court overturned that extension on August 26, 2021, terminating the moratorium. The Court's ruling was based on the basis that the CDC had overstepped its powers.

And the moratorium did not prevent delinquent rent from continuing to accumulate. It merely ordered that renters could not be evicted for not paying at that period. Landlords were further authorized to attach late fines, penalties, and interest to the times when rent remained unpaid. Tenants could have realized that they owing a mound of debt to their landlords after the moratorium expired. Landlords have been able to begin or continue eviction procedures from August 26.
Note
These regulations don't necessarily apply if you reside in federally subsidized housing. And many states have their own programs in place for low- and moderate-income families that remain in existence despite the Supreme Court's federal judgment.

Ask for Hardship Agreements

Ask your bank or credit card lender for a hardship arrangement if your jobless benefits don’t cover all your payments. Many banks are no longer promoting COVID-19 relief programs, but they may still let you to stretch out or push back payments on a case-by-case basis.

You may be eligible to postpone or lower your payments for up to 360 days if you’re a homeowner impacted by COVID-19 and your mortgage is federally guaranteed or insured.
Note
You'll be responsible for paying back any mortgage payments that you suspend during forbearance.

Build Your Emergency Fund

Job loss is one of the key reasons to establish an emergency fund. Consider putting money toward this rainy day fund before you pay more than the minimums on your debt if you have any money left over after taking care of the fundamentals. It will offer you with a safety net in the event that your unemployment benefits expire before you locate your next job.

Having stable home, keeping your utilities on, and sustaining enough food and health care are all more vital than paying off debt. Saving funds now helps to guarantee that you can handle these essentials or unforeseen costs without going further into debt.

Focus on High-Interest Debt

You may turn to your high-interest loan when you have three to six months’ worth of spending stowed aside. Prioritize the debts with the greatest interest rates. That will be credit card debt for most individuals.

Payments and interest on student loans controlled by the Department of Education were halted until Jan. 31, 2022, in response to the COVID epidemic. This relief was again extended until Aug. 31, 2022. Consider taking advantage of this moratorium to create your emergency fund, then pay down other debt collecting interest if you have federal student loans.
Note
Contact your servicer to check if company provides hardship programs if you have private student loans.

The Bottom Line

Unemployment compensation is frequently modest. Relief measures made benefits more generous than normal, at least for a time, but enlarged benefits still don't reach far enough for certain individuals. It's crucial to seek for hardship agreements and check your expenditure if your benefits don't stretch far or endure long enough to get you through the crisis.

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