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Credit card debt is a financial burden for many Americans.

In fact, Credit Karma member data pulled on Jan. 4, 2024, reveals that members with at least one credit card carry an average of $7,288 in card debt, with some generations and geographic groups holding much higher average debt (see Methodology).

Many factors could turn your credit cards into a source of financial stress, including economic conditions, high interest rates and high balances carried from month to month. If you’re struggling to keep up with the monthly payments on your credit cards, you may have options for credit card debt relief — but you’ll want to beware of third-party debt settlement programs that might try to scam you.

• What is credit card debt relief?
• Should I seek credit card debt relief?
• What kinds of credit card debt relief are available?
• What are potential pitfalls of credit card debt relief?
• Next steps: Find the relief that’s right for you

What is credit card debt relief?

If you’re dealing with a crushing credit card balance, you may consider anything that helps you manage that debt to be a relief. And it’s true there are many ways to alleviate your debt.

Credit card debt relief can come in many forms. And there isn’t a one-size-fits-all approach. It can involve something you do on your own, such as using a lower-interest personal loan or credit card to pay off high-interest credit card debt. While this will not eliminate the amount you owe, it may help you to pay off more of your principal balance faster. Relief could also come from a formal negotiation between you and your credit card issuer that actually lowers the amount of debt you need to pay back.

How to manage credit card debt

• How to get out of credit card debt
• The best way to pay off credit cards

Should I seek credit card debt relief?

Anyone struggling to pay off their debt can look into credit card debt relief options to find one that may help their particular situation. Credit card debt relief may be worth pursuing in these situations.

• Your credit card debt is making it difficult to pay other bills.
• You’re receiving collection notices.
• You’re feeling overwhelmed by your debt and overall financial situation.

What kinds of credit card debt relief are available?

There are a few options available to help you make your credit card debt more manageable. You’ll have to do some research to decide which is the best move for your situation, but each of the following paths may be worth a look.

Credit card balance transfer

Transferring debt from a credit card with a high interest rate to one with a lower interest rate is one step you can take on your own. If you qualify for a balance transfer card, you may be able to secure a lower interest rate, which could help you pay down the debt principal faster.

While this tactic won’t relieve you of the amount of debt you owe, a balance transfer can also allow you to consolidate multiple credit card balances into one — essentially repackaging your debt and simplifying your bills.

But be aware that balance transfers can be complicated and come with plenty of risks. You may also have to pay a balance transfer fee — usually a percentage of the amount being transferred — and low promotional interest rates (typically 0%) only last a limited time. To get the most benefit from your balance transfer, you’ll want to pay off as much of the debt as possible before the promotional rate ends and the APR increases.

Learn more about balance transfers.

• What is a balance transfer?
• How does a balance transfer work?
• The pros and cons of balance transfers
• 5 things to watch out for with intro balance transfer offers

Consolidate with a personal loan

Another way to possibly reduce the amount of ongoing interest payments on your credit card debt is to consolidate your debt into a lower-interest personal loan. After taking out a personal loan that has a lower interest rate than your credit cards, you can use the loan to pay off your credit card debt — giving you a chance to pay it down faster with one simplified monthly payment.

As with credit card balance transfers, consolidating credit card debt into a personal loan won’t reduce the amount you owe, but may boost your effort to get the debt under control.

Learn about consolidating credit card debt.

• Should you take out a loan to pay off credit card debt?
• Getting a debt-consolidation loan with bad credit: How to do it
• 7 ways to consolidate credit card debt
• How does debt consolidation affect my credit scores?

Debt management plans

Nonprofit credit counselors generally can help you set up a debt management program, also called a debt management plan. Typically, debt management plans should help you pay off your debt in full over a set period of time. Your credit counselor may negotiate directly with your creditors on your behalf, and creditors may agree to waive fees or lower your interest rate.

When you have a debt management plan, it may involve making one lump payment every month to the nonprofit, which then sends the money directly to your creditors.

Learn more about debt management plans.

• Your guide to understanding credit counseling

Negotiating a debt settlement program

Debt settlement basically means negotiating with a creditor — in this case, your credit card issuer — to accept a lump sum payment that’s less than the amount you owe. There are two ways to negotiate a debt settlement: on your own working directly with the creditor or with the assistance of a third-party (and usually for-profit) debt settlement company.

Debt settlement programs may help you reduce the amount of your debt and avoid getting into more dire financial straits, like bankruptcy. Some credit card issuers may offer other relief such as a lower interest rate, a smaller minimum payment, lower fees and penalties, or a fixed payment schedule.

But these companies may encourage you to stop making payments on your debt before reaching an agreement with your creditor. If that’s the case, your credit can be negatively affected, so think carefully before entering into any agreement.

Learn more about debt settlement.

• Understanding debt settlement: Is it worth it?
• How to negotiate debt with your credit card company
• How a hardship plan can affect your credit

Beware of debt relief scams

Debt settlement through a third party is already full of risks that could affect your credit scores or even leave you owing more. Some companies that claim they’ll help you settle debt are nothing more than scammers that promise more than they might be able to deliver.

The Federal Trade Commission points to some warning signs that a debt relief company may not be legit. Watch out if the company does the following:

• Guarantees it’ll make your credit card debt disappear
• Charges fees before settling your debt
• Claims it can get you into a new government program for people with credit card debt
• Fails to explain the consequences of halting payments and communications with your creditors
• Pledges to stop all collection calls and legal actions
• Guarantees it can settle your credit card debt for pennies on the dollar

Bankruptcy: The last resort option

Bankruptcy’s effect on your credit is severe and can last for many years, so it’s critical to explore and exhaust all other options before considering bankruptcy. If you decide to pursue bankruptcy, the two kinds most commonly used for individuals are Chapter 7 and Chapter 13. Your circumstances will determine which type you should file.

Take note: Bankruptcy doesn’t necessarily discharge all your debt. Certain forms of debt, like student loans, can be very difficult to discharge, and the bankruptcy courts will ultimately decide how much of your debt gets eliminated.

Learn more about bankruptcy.

• What is a bankruptcy discharge?
• What’s the difference between Chapter 7 and Chapter 13 bankruptcy?
• What is Chapter 7 bankruptcy?
• How to complete the Chapter 7 bankruptcy means test
• What is Chapter 13 bankruptcy?
• How long does bankruptcy stay on your credit reports?

What are potential pitfalls of credit card debt relief?

While the prospect of getting relief from high credit card debt can be appealing, some solutions come with potential drawbacks.

• Debt settlement and bankruptcy can affect your credit. While these efforts can help manage your debt payments, they can also affect your credit for several years. Not having repaid your credit according to the original terms of your credit agreement can stand out to potential lenders, so think about long-term consequences when seeking short-term relief. Plus, if your debt settlement company advises you to stop paying your creditors directly, you could be subject to additional interest charges and late fees. (Debt consolidation can also affect credit scores, though the impact typically is more minor and more temporary.)
• Credit card debt relief may cost you money. If you take out a personal loan or a balance transfer card to pay off credit card debt, you’ll likely face fees and interest. Similarly, declaring bankruptcy could mean you need to pay court costs, and even nonprofit organizations and credit counselors generally charge for their services.
• Discharged or reduced debt can affect your federal income taxes. If you have your credit card debt forgiven, the IRS will likely view your canceled debt as income and tax accordingly.

Next steps: Find the relief that’s right for you

If you’re struggling with credit card debt and aren’t sure what tactic will bring you the most relief, it’s worth considering talking to a nonprofit credit counselor. A reputable credit counseling organization may be able to help you understand your options and develop a plan to manage your finances and pay off debt.

The FTC offers some guidance on how to choose a reputable credit counselor, and the U.S. Department of Justice provides a searchable list of approved credit counseling agencies.

If you find a debt relief plan that’s right for you, it’s important to make any payments associated with your debt relief plan on time. Paying down credit card debt can be difficult, but with the right information and some help, you can take on the challenge and succeed.

Methodology

To determine averages across credit card debt, we analyzed the accounts of more than 85 million U.S. Credit Karma members. All aggregate data analyzed was pulled on Jan. 4, 2024. The data came from members’ TransUnion credit reports, and the averages were based on information from the last 90 days. For the purposes of this analysis, credit card debt is defined as any unpaid balance existing on members’ open credit cards in aggregate at the time the data was pulled. All numbers in this report were rounded to the nearest whole.

Striking the right balance of how much money to keep in your checking account takes some planning.

Keep too little and you could run afoul of any minimum balance requirements or have trouble covering monthly bills. Leave too much in your checking account and you might miss out on opportunities to grow your money in a high-yield savings account or a certificate of deposit, or CD.

Let’s look at some factors to consider when deciding how much you should keep in your checking account.

• How much money should I have in my checking account?
• How can I calculate how much I should keep in my checking account?
• How much is too much to keep in my checking account?
• Next steps: What can I do if I’m keeping too much money in my checking account?

How much money should I have in my checking account?

How much you should keep in your checking account is an individual decision — only you can decide the amount that’s exactly right for you. But a good rule of thumb is to keep just enough in the account to cover the “musts.”

Everyday expenses

Checking accounts are designed to help you pay for things you purchase every day. You can use your debit card, rather than cash, to pay for things like groceries, your morning coffee or pet treats. You want to be sure there’s always enough in your account to cover these day-to-day costs for one to two months. Ideally, you’d have a separate emergency fund savings account where you’ve put aside three to six months’ worth of these same living expenses.

Recurring bills

Certain bills must get paid every month, such as your rent or mortgage, utility bills or your cellphone bill. Your checking account should always have enough in it to cover expenses that recur monthly.

Minimum balance requirements

Many checking accounts come with a minimum balance that you must maintain in order to avoid a monthly maintenance fee. You should keep enough in the account to ensure your balance doesn’t dip below that minimum amount and trigger fees.

Overdraft cushion

Overdrawing your account — making payments that exceed the available account balance — can cause the bank to hit you with some big overdraft fees. It’s a good idea to always have a buffer of extra money in your account to help reduce the risk of overdrawing your checking account.

How can I calculate how much I should keep in my checking account?

Some basic math can help you decide how much to keep in your checking account. First, add up all your expenses for a month, both recurring monthly costs and everyday spending. Next, add in your minimum balance amount (if your account has one). Finally, give yourself a cushion to prevent overdrafts. If you’ve already factored in a minimum balance amount, you may not need much of an overdraft cushion.

Here’s an example of what that calculation might look like.

Image: mnhowmuchinchecking

How much is too much to keep in my checking account?

Having a lot of cash sitting in your checking account may seem like a non-issue. But while a big checking account balance might not cause you problems, you could miss some opportunities to put your money to work for you elsewhere. Many checking accounts don’t earn interest, and even those that do generally earn less interest than other types of financial products, like savings accounts or CDs.

When might you have too much in a checking account?

• If you have more than enough to cover two to three months’ worth of expenses
• If you don’t have a savings account
• If you don’t have a separate emergency fund
• If you’re missing opportunities to put your money somewhere more profitable

Should I keep all my money in one bank?

Many Americans have accounts at more than one bank. Whether you keep all your money at one bank or deal with multiple financial institutions is a personal choice — and both options have their pros and cons.

For example, putting some money in an account at a different bank may give you access to certain features that you can’t get at your primary bank. Or you may open an account at a second bank to take advantage of a higher interest rate. But keeping all your money in checking and savings accounts at the same bank may make it easier to avoid monthly maintenance and overdraft fees if the bank allows you to link your accounts.

Next steps: What can I do if I’m keeping too much money in my checking account?

If you have more money in your checking account than you need, consider relocating the excess to a financial product that could help your money grow. Here are some options to consider.

• High-yield savings account — Savings accounts generally have annual percentage yields around 0.01%. But a high-yield savings account could have a significantly higher rate — anywhere from 0.3% to 0.9%.
• Money market account — These accounts have some features of a traditional checking account but generally pay higher interest rates. As of Jan. 4, 2021, the national rate for money market accounts was around 0.07%, according to FDIC data.
• Certificate of deposit — CDs are savings vehicles that provide a set amount of interest over a certain term of months. Generally, the longer the term, the higher the interest rate. As of January 2021, the national rate was 0.04% for a one-month CD and 0.33% for a 60-month CD, according to the FDIC. Take note that any money you withdraw from a CD ahead of its maturity date could be subject to early withdrawal penalties.
• IRA — An individual retirement arrangement is a tax-advantaged account that helps you put money away for retirement. If you don’t have one but are eligible to open an IRA, you can consider opening one with your extra checking account money. Or if you have one and haven’t yet made the maximum contribution for the year, consider putting some money into the account. Take care, though: If you withdraw from your IRA before age 59 ½, the funds will be included in your gross income for the year and subject to tax — plus a 10% tax penalty unless you meet certain requirements.

You can fall behind on your taxes if you don’t file a federal income tax return (if you’re required to file), or don’t pay any tax you owe, by the due date — generally April 15 for most people.

Owing back taxes can feel overwhelming. The prospect of facing penalties and interest, or just the sheer work of filing a past-due return, may tempt you to keep putting things off.

But we can’t stress enough that being proactive is the way to go when it comes to dealing with the IRS. As soon as you realize you may owe back taxes, or you’ve missed a filing deadline, it’s important to file and pay those outstanding taxes as soon as possible to help minimize the consequences of falling behind.

Let’s look at some things to know when you have to pay or file back taxes.

• How do I file a back tax return?
• Why should I file back taxes?
• What could happen if I don’t file back taxes?
• What if I owe more than I can pay?
• Next steps: Plan ahead for next year

How do I file a back tax return?

Filing a past-due return is basically the same as filing a return on time, with a few important differences. Here’s how it breaks down.

1. Gather all your documents

Whenever you file a return, you’ll need all the forms that show your income for the tax year you’re filing for. So if, for example, you’re filing a return for the 2023 tax year, you’ll need any W-2s, 1099s, interest statements and other types of income statements that apply to that year.

Hopefully, you saved those documents in a tax records file. If you’re missing information, you can request a wage and income transcript from the IRS for a previous year. The transcript will show all the information returns the IRS received on your behalf for that tax year, such as W-2s, 1099s, 1098s, IRA contributions you made and more.

And, if you’re claiming certain deductions or tax credits, you’ll need to have all the necessary documentation, such as receipts for medical expenses or mortgage interest you paid during the tax year.

2. Download the tax forms you need

Go to the IRS website to download tax forms for the year you need to file. Forms can change from year to year, so be sure you’re using the correct one.

3. Complete and mail the forms, and pay anything you owe

You may be able to use an online tax preparation service to complete the forms, but you won’t be able to e-file your back tax return. You’ll need to print out and mail the forms to the address listed in the 1040 instructions for the tax year you’re filing. If you’re unsure how to proceed, a tax professional can help. You may also be able to get free assistance from the Volunteer Income Tax Assistance or Tax Counseling for the Elderly programs.

And if you have a tax liability — back taxes, penalties and interest — you’ll need to pay it or request a payment plan.

Why should I file back taxes?

It’s against the law to not file a return for a tax year when you’re obligated to file. And there are other compelling reasons to file and pay back taxes.

Minimize penalties and interest

The IRS can penalize you if you don’t file a return or pay any tax you owe by the deadline. Generally, the penalty for not filing is more than the penalty for not paying. You may also be charged interest on any unpaid tax balance.

Filing your back taxes and paying anything you owe may help limit the amount of interest and penalties you’re subject to for missing the deadline.

Claim a tax refund

If you’re owed a refund for a particular tax year but neglected to file, it’s important to know that you have a limited time — three years from the original due date of the return — to file your back tax return and still be eligible to claim your refund.

Keep in mind that if you file a return for the current year and are due a refund, the IRS may hold onto that refund if you have any past-due returns you haven’t filed yet.

Prevent a possible credit obstacle

Tax returns may play a role in credit decisions — lenders might ask you for copies of your filed tax returns. If you’re missing a return for a year when you should have filed, your loan processing could possibly be delayed.

Preserve your passport

If you owe more than $62,000 in taxes, penalties and interest, the IRS will notify the U.S. State Department, which in turn can deny your application for a new or renewed passport. The State Department may also revoke your passport.

What could happen if I don’t file back taxes?

If you don’t file a tax return for a year when you should have filed, or don’t pay federal income tax you owe, the IRS can take action.

The agency may send you a notice or a bill. Or, it may file a return on your behalf — and might not bother to give you any tax breaks you’re eligible for. Remember that the IRS can easily do this because it likely already has your income information from your employer, customers you do gig work for (if you’re self-employed), banks and other sources.

Additionally, federal law generally allows the IRS to try to collect on a tax debt for 10 years, though there can be exceptions.

What if I owe more than I can pay?

If you’re facing a tax bill you can’t afford to pay in full right away, you may have payment options.

• Consider paying the IRS with a credit card or personal loan. Using credit to pay your tax debt likely means you’ll pay interest to the lender. But those costs may be less than the penalties and interest you might face if you fail to pay the IRS on time and in full.
• If you owe $50,000 or less, you can request an online payment agreement from the IRS. Short-term installment agreements give you 180 days or less to pay. A long-term agreement can give you up to 72 months to pay what you owe in monthly payments.
• If you meet certain criteria, you may be able to ask the IRS for an offer in compromise, which could allow you to settle your tax debt for less than what you owe.
• In dire cases when paying anything might prevent you from covering your basic life expenses, the IRS may agree to temporarily delay collection of your past-due tax debt.

Next steps: Plan ahead for next year

Filing accurate tax returns by the filing deadline and paying all the tax you owe on time goes a long way to help you avoid problems with the IRS. Don’t wait to clear up your back taxes before getting a jump start on this year’s tax return.

Start a file for all your tax documents, such as income statements from your employer, interest statements from your bank or receipts for deductible expenses you hope to itemize. Having everything in one place will be helpful when it’s time to prepare your return.

You can use the IRS Tax Withholding Estimator to help ensure you’re having the right amount of tax withheld from your paycheck. If you have too little withheld throughout the year, you could face a tax bill when you file next year. And if you withhold more than necessary, you could get a refund next year.

Relevant sources: IRS Publication 5123 | IRS Tax Withholding Estimator | IRS: Filing Past Due Tax Returns | IRS: Free Tax Preparation for Qualifying Taxpayers | IRS News Releases | IRS Internal Revenue Manual | IRS: Eight Facts on Late Filing and Late Payment Penalties | IRS Fact Sheet: Help Yourself by Filing Past-Due Tax Returns | IRS: Extension of Time to File Your Tax Return | IRS Topic No. 202 Tax Payment Options

This article was fact-checked by our editors and Jennifer Samuel, senior product specialist for Credit Karma.

If you’re a freelancer or independent contractor, you know you have to juggle multiple tax forms to report and pay your federal income taxes. Starting with the 2020 tax year, there’s one more to add to the mix — the new 1099-NEC.

You’ve likely received 1099-MISC forms in the past for self-employment work. Next year, you may receive the 1099-NEC instead for your 2020 taxes. You’ll need this form when you file your federal income tax return in 2021.

Let’s look at the new form, what’s on it, and what you should do if you receive one.

• What is form 1099-NEC?
• When will I get a 1099-NEC?
• What information is on the 1099-NEC?
• Next steps: What to do with a 1099-NEC

What is form 1099-NEC?

The 1099-NEC, which the IRS has launched for the 2020 tax year, is the newest addition to a long list of “information returns” — forms that businesses use to report certain taxable transactions to the IRS.

The “NEC” in the form name refers to “nonemployee compensation,” which used to get reported on the 1099-MISC information return. Businesses will now use Form 1099-NEC to report independent contractor payments and payments made to other types of service providers who aren’t considered company employees. 

When will I get a 1099-NEC?

If you’ve worked as a freelancer or independent contractor in 2020, or as a self-employed professional like an attorney or accountant, you should receive a 1099-NEC from each organization that paid you at least $600 during the tax year. Organizations are supposed to file the form by Jan. 31, 2021, for the 2020 tax year.

If you do business as an LLC that’s treated as a C- or S-corporation, though, you might not receive a 1099-NEC.

Learn more about taxes as an independent contractor.

What information is on the 1099-NEC?

Since the 1099-NEC is an information return intended to give the IRS details on taxable transactions, it contains information about both parties involved, including …

• The name, address, phone number and taxpayer identification number, or TIN, of the company that made the payments
• The name, address and TIN of the individual that received the payments
• The amount of nonemployee compensation paid
• The amount of federal or state income tax withheld, if any

Next steps: What to do with a 1099-NEC

When you receive a 1099-NEC, the company that sent it should also have provided the information to the IRS and your state’s taxing authority (for states with an income tax). You’ll need to file your copy with your federal income tax return, and possibly with your state return, if you’re required to file.

If your nonemployee compensation is self-employment income, you’ll also need to report the amount from your 1099-NEC on Schedule C or F and on Schedule SE of your Form 1040 tax return. And you’ll need to file all those forms with your return.

Of course, like all tax forms, you should keep a copy of each 1099-NEC you receive with your securely stored tax documents.

“If your 1099-NEC is wrong, you’ll need to ask the payer to correct it and issue you a corrected form,” says Christina Taylor, senior manager of tax operations for Credit Karma. “The payer has to send out your form 1099-NEC by the end of January if they’re issuing it to you for compensation you were paid as a non-employee.”

Relevant sources: IRS: About Form 1099-NEC, Nonemployee Compensation | 2020 Form 1099-NEC | IRS: Forms and Associated Taxes for Independent Contractors | IRS: How to report nonemployee compensation and backup withholding | IRS: About Form 1099-MISC, Miscellaneous Income | IRS: Information Return Reporting | IRS: A Guide to Information Returns | Instructions for Form 1099-MISC (2019) | Instructions for Forms 1099-MISC and 1099-NEC (2020)

This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma.

When it’s time to file your 2020 federal income tax return, you’ll have the chance to take a standard deduction amount that’s a bit higher than 2019 standard deductions.

That’s because standard deduction amounts adjust annually for inflation. But the amount of your standard deduction depends on multiple factors, including your filing status.

• What are the standard deduction amounts for 2020?
• How does the standard deduction work?
• Who can or can’t take the standard deduction?
• When should I take the standard deduction?
• What were the standard deduction amounts in 2019 and 2018?

What are the standard deduction amounts for 2020?

The 2020 standard deduction amounts have increased across filing categories — but just how much of an increase depends on your filing status. We’ve broken it down below.

How does the standard deduction work?

All tax deductions reduce the amount of your income that’s subject to tax. If you have a lower taxable income, you might pay less tax. This generally applies to federal and state income taxes.

When you fill out your federal income tax return, you choose to either itemize deductions — which requires some calculations based on actual expenses — or take the standard deduction.

On the Form 1040, U.S. Individual Income Tax return, you apply deductions after taking any adjustments to income that you qualify for (also called above-the-line-deductions). Above-the-line deductions include items like student loan interest, money set aside in a flexible spending account, IRA contributions, other retirement account contributions and health savings account contributions.

A big advantage of taking the standard deduction is that it’s easy. You don’t have to do any calculations to determine your standard deduction amount, because the IRS has already done that for you. You just need to know your filing status.

Filers who are age 65 or older, or those who are blind, can get a higher standard deduction amount.

Who can or can’t take the standard deduction?

Most individual taxpayers can use the standard deduction, but there are some exceptions. You can’t use the standard deduction if …

• You’re married and file a separate return, and your spouse itemizes deductions on their return (in that case, you’d have to itemize too).
• If you file a tax return for a period of less than 12 months because of a change in your annual accounting period.
• You’re a nonresident alien or dual-status alien during the year. (But if you’re married to a U.S. citizen or resident alien, you can choose to be treated as a U.S. resident for tax purposes and could then take the standard deduction.)

When should I take the standard deduction?

You should take the standard deduction if one of these situations applies to you.

• It gives you the greater tax benefit vs. itemizing deductions. For example, if you don’t have enough qualifying expenses (like mortgage interest or medical expenses) to itemize your deductions, the standard deduction for your filing status could give you the bigger tax benefit.
• The tax code requires you to do so. For example, if you’re married filing separately and your spouse takes the standard deduction, you also have to take it.

What were the standard deduction amounts in 2019 and 2018?

The amount of the standard deduction virtually doubled between 2017 and 2018 because of the Tax Cuts and Jobs Act of 2017 — also known as “tax reform.” The act keeps the higher standard deductions in place through the 2025 tax year. And the IRS continues to make annual inflation adjustments to standard deduction amounts.

Here were the standard deduction amounts for the 2019 and 2018 tax years.

What’s next?

When you’re ready to file your 2020 tax return in 2021, it may pay to tally up your itemized deductions and see which approach reduces your taxable income the most — the standard deduction or itemizing.

If you don’t have enough deductible expenses to benefit from itemizing, the standard deduction is a simple way to reduce your taxable income for the year — which could in turn mean a lower tax bill.

Relevant sources: IRS provides tax inflation adjustments for tax year 2020 | IRS: 1040 and 1040-SR Instructions (2019) | IRS Topic No. 501: Should I Itemize? | IRS: Credits and Deductions for Individuals | IRS Publication 525 Taxable and Nontaxable Income (2019) | IRS Form 1040: U.S. Individual Income Tax Return (2019)| IRS: 1040 and 1040-SR Instructions (2018) | IRS provides tax inflation adjustments for tax year 2019

Every state, plus the District of Columbia, allows registered citizens to vote by mail. And many provide online tools to help you keep tabs on the progress of your absentee ballot.

More than 81 million absentee ballots have been requested or automatically sent to voters ahead of the 2020 election, according to the New York Times. If you’ve chosen to vote by mail this year and want to keep tabs on the progress of your ballot, let’s look at some information that might help.

• Can I track my absentee ballot?
• How do I track an absentee ballot?
• What if there’s a problem with my absentee ballot?
• When will my mail-in vote be counted?
• Election Day registration and provisional voting

Can I track my absentee ballot?

In nearly every state, Americans who vote by absentee ballot in 2020 will be able to monitor the status of their ballots. Just four states — Illinois, Mississippi, Missouri and Texas — do not provide ballot tracking.

If you vote by absentee ballot in a state that offers tracking, you may have access to online tools to help you track your absentee ballot. Or you may need to contact your county-level election officials for information.

Click a state name in the table below to visit that state’s online ballot tracking page.

States that provide online tracking generally allow voters to monitor the progress of their absentee ballot application, as well as confirm when election officials receive, accept and count their completed and returned ballot.

How do I track an absentee ballot?

If you live in the District of Columbia or one of the 46 states that provide ballot tracking services, you’ll need to start with the state’s designated tracking portal.

You may need to create a voter account and/or provide some identification and information in order to track your ballot. States may require a combination of the following:

• A voter ID number
• Driver’s license number
• The address where you’re registered to vote
• Last four digits of your Social Security number
• The county where you’re registered
• Your full name
• Your birth date

Depending on the state, the tracking tool may tell you …

• That election officials received your absentee ballot request (if you live in a state that doesn’t automatically send ballots to all registered voters)
• The date a ballot was mailed to you
• The date election officials received your completed and returned ballot
• Whether it was received, and accepted or rejected (and possibly why, if it was rejected)

What if there’s a problem with my absentee ballot?

If election officials reject your absentee ballot, the online tracking tool may tell you why it was rejected and provide information on what to do next. Ballots can be rejected for different reasons, including failure to properly sign the ballot or the return envelope before you return it. It’s important to follow all the instructions that come with your mail-in ballot to help ensure the state can accept and validate it.

If your state doesn’t provide online tools to track your ballot status, or it has an online tracking system but doesn’t explain why your ballot was rejected, you’ll have to do some legwork. You may be able to get guidance through the website of your state’s secretary of state or by contacting local officials, such as a municipal clerk or your county board of elections.

When will my mail-in vote be counted?

Just as deadlines for requesting and returning absentee ballots can vary, so does the timeline for when states can begin counting absentee ballots. State law — not federal — determines when a state begins counting mailed in votes.

Some states begin processing ballots as soon as they receive them, while others don’t begin until Election Day (Nov. 3 this year). Others may begin a week or two before Election Day, and a handful begin nearly a month in advance.

The National Conference of State Legislators, or NCSL, provides a state-by-state table of when absentee ballot processing begins this year.

Election Day registration and provisional voting

You must be registered to vote by absentee ballot ahead of Election Day. But what if you missed registration and absentee voting deadlines? You may still be able to vote.

According to the NCSL, 21 states and the District of Columbia allow eligible voters to register and vote with a provisional ballot on Election Day at their designated polling place. You can find an interactive map on the NCSL website and more information on states with same-day registration at VoteAmerica. Restrictions may apply, such as being required to show ID, so it’s best to check your state’s individual rules so you know what to expect at the polls. This VoteAmerica chart shows identification requirements for voting in each state.

The right to vote is foundational to our democracy, and states give voters multiple ways to take part in this critical process. And, if you vote by mail in 2020, most states provide ways to stay on top of the status of your ballot and make sure your vote counts.

Mortgage relief programs are designed to help homeowners facing financial hardship stay in their homes.

Your mortgage may be the biggest bill you pay every month, and unexpected circumstances like a job loss, health crisis or other expenses can make it difficult to keep up with mortgage payments. Mortgage relief programs may help. Let’s look at the different types of relief, how they work and who’s generally eligible for each program.

• What is mortgage relief?
• What types of mortgage relief are available?
• Are there government mortgage relief programs?
• Beware mortgage relief scams

What is mortgage relief?

Mortgage relief can come in different forms, but generally mortgage relief programs aim to help homeowners who are struggling to make their monthly mortgage payments or who may be facing foreclosure.

The federal government, some state governments and lenders can all be sources of mortgage relief. The type of relief you might qualify for will depend on multiple factors, including your circumstances and who owns your mortgage — a private lender or a federally backed one.

What type of mortgage do I have and who owns it?

To qualify for certain types of government mortgage relief, your mortgage must be backed by either the federal government or a government-sponsored enterprise such as Fannie Mae or Freddie Mac.

If your original lender has sold your mortgage, you may be unsure who currently holds your home loan. Here are a couple of things to try in order to find out.

• Use the FannieMae or FreddieMac lookup tools to see if one of them owns your mortgage.
• Call or write your mortgage servicer and ask it to provide information about the owner of your mortgage.

What types of mortgage relief are available?

Multiple types of mortgage relief programs are available. Some are generally available to everyone (refinancing, for example) — while others (such as COVID-19 forbearance) are for people experiencing hardships caused by specific circumstances.

Mortgage forbearance programs

Forbearance means your mortgage lender agrees to temporarily pause or lower your monthly mortgage payment for an agreed-upon period of months. But you’ll have to catch up on the reduced or paused payments eventually, so understanding how and when your lender will expect you to do that is key.

Loan deferment vs. forbearance: What works for your student loan or mortgage?

Mortgage refinancing

When you refinance a mortgage, you apply for a new loan and use the proceeds from that loan to pay off your original mortgage. If your credit is good, you may be able to secure a new mortgage with more-favorable terms than your old one, which could result in a lower monthly payment.

But there are caveats. If missed payments have already affected your credit scores, it may be more difficult to refinance and get better terms than you have on your existing mortgage. And, if you qualify to refinance, you’ll need some money to cover closing costs.

Ultimately, refinancing may make the most sense if your credit hasn’t taken a hit and you’re still current on your mortgage.

Learn more about refinancing a mortgage.

• How does refinancing a mortgage work?
• When is refinancing a mortgage worth it?

Loan modification

If you’re struggling to make mortgage payments, you can ask for a loan modification. This is a scenario where the lender agrees to permanently change the terms of your mortgage to help you better manage your payments in the future. A lender may agree to reduce your interest rate, give you more time to repay the loan or allow you to add missed payments to the loan balance instead of foreclosing over the missed payments.

Take note that the federal government’s Home Affordable Modification Program, which allowed eligible homeowners to have their monthly payments reduced, is no longer available.

Reverse mortgages

Generally used by older homeowners, a reverse mortgage can allow borrowers to get cash for the equity in their homes.

Borrowers must pay property taxes and homeowners insurance but don’t have a monthly mortgage payment. Instead, the amount they borrowed, plus interest, FHA insurance fees and other fees, gets paid either by the borrower when they move out of the home or by their heirs when they pass away.

Unlike traditional mortgages, where you make payments and pay down your balance over time, reverse mortgage balances rise. It’s possible for a reverse mortgage balance to eventually exceed the value of the home. But if their reverse mortgage is covered by FHA insurance, borrowers (or their heirs) aren’t required to pay the portion of the loan balance that exceeds the home’s value.

Learn more about reverse mortgages: What is a reverse mortgage?

New payment deferral option

If your Fannie Mae- or Freddie Mac-backed mortgage is already in forbearance because of coronavirus-related financial hardship, you may be able to put off making up your delayed or reduced payments until you sell or refinance your home, or until your mortgage reaches maturity.

The Federal Housing Authority, Fannie Mae and Freddie Mac are requiring mortgage servicers to evaluate borrowers’ financial situations to decide how they should repay the deferred mortgage payments. Deferral is one of several options.

Are there government mortgage relief programs?

The federal government and some state governments provide mortgage relief programs designed to help homeowners struggling to make their mortgage payments.

• Hardest Hit Fund programs, available in 18 states and the District of Columbia, help homeowners with loan modification, mortgage payment assistance and transition assistance. Dec. 31, 2020, is the last date for applications, but deadlines vary by state and may be sooner.
• Flex modification programs may be available for mortgages backed by Fannie Mae and Freddie Mac. If you’re eligible, the programs may help you lower your mortgage payments and avoid foreclosure. Talk to your mortgage company to see if you’re eligible.
• Federally backed loans may also be eligible for COVID-19 related relief. Measures vary, but you may be able to receive loan forbearance for up to 12 months, have penalties or late fees waived, get your loan modified or payment deferral. Talk to your loan servicer to see what aid might be available to you.

Beware mortgage relief scams

Experiencing a stressful financial hardship can leave you vulnerable to scammers, and mortgage relief scams can prey on your fear of foreclosure. During times of widespread financial crisis, scams may increase and tactics become more aggressive and convincing.

It’s important to be alert for signs that a mortgage relief company may really be a scam, including …

• Demanding upfront fees. It’s illegal to charge upfront fees for mortgage assistance services.
• Promising to get your loan modified. Companies aren’t allowed to make claims they can’t substantiate, or that are false or misleading.
• Asking you to sign over the title to your home. Scammers often ask you to “temporarily” sign over the deed to your home.
• Asking you to sign papers that you don’t understand. Never sign something you don’t understand. Consult a lawyer if something is too complicated, and never sign documents that have blank spaces to be filled in later, or that have errors or false statements.
• Telling you to begin sending payments to someone other than your mortgage company. Always make mortgage payments directly to your lender.
• Telling you to stop making payments. If a company tells you to stop making payments, it’s required to also inform you of the possible negative consequences, including foreclosure and damage to your credit.

This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma. It has been updated for the 2020 tax year.

Individually, life insurance and taxes are complicated. When they intersect, it may be difficult to know what lies ahead: tax-free income or a big tax bill?

The good news is that life insurance payouts to individuals generally aren’t subject to federal income tax.

But that doesn’t mean life insurance never affects federal taxes. Let’s discuss some situations when payouts are and aren’t taxable, when premiums may be part of your tax bill — and how to best protect your loved ones from a potential tax liability.

• When is a life insurance payout not taxable?
• When is a payout taxable?
• Are life insurance payouts subject to estate tax?
• When are life insurance premiums taxable?
• Next steps: Ways to protect life insurance proceeds

When is a life insurance payout not taxable?

Generally, life insurance benefits paid out to individual beneficiaries aren’t subject to federal income tax. That’s because you don’t have to include life insurance payouts in your gross income or report them to the IRS.

Let’s consider an example: You’re the beneficiary on someone else’s policy, such as a parent or spouse, and receive a payout from the policy when the covered person passes away. Because you’re the named beneficiary, you won’t have to pay federal income tax on that payout.

If you’re the person covered by the policy, have a terminal illness and are receiving accelerated death benefits (paid out to you while you’re still alive), those generally aren’t taxable either.

When is a payout taxable?

But as we mentioned above, in certain situations, you may have to pay tax on all or a portion of life insurance proceeds.

Interest is taxable

If you receive a life insurance payout that has accrued interest, you’ll likely have to pay tax on that interest. This could happen if the policy is set up for the insurer to hold onto the payout at the time of the policy holder’s death and release it to the beneficiary after a set amount of time. Or, this rule may apply if you choose to receive the payout in installments and the carrier pays interest.

Cash surrender is partially taxable

When you surrender a policy for cash, you may have to pay tax on any proceeds that exceed the cost of the policy. This usually includes the total amount in premiums that you paid for the policy, minus any rebates, dividends, unrepaid loans or refunded premiums that aren’t otherwise included in the income you report to the IRS.

Transfer of policy is partially taxable

If you pay cash or other compensation to have a policy transferred to you (rather than receiving a standard payout), you’ll likely have to pay federal income tax on the portion of the policy value that exceeds the amount you pay for the transfer (plus any premiums you pay and certain other taxable amounts). For example, if you’ve paid $5,000 to take possession of a policy with a $45,000 death benefit, and didn’t pay any premiums or other qualifying amounts, you’ll probably have to pay tax on $40,000.

Are life insurance payouts subject to estate tax?

Like the name says, estate tax can apply to an individual’s estate, which the IRS considers to be everything a person owns or has an interest in when they die.

Based on that definition, life insurance proceeds paid out to a beneficiary don’t count as part of their estate — because that money doesn’t belong to the insured. It belongs to their beneficiaries after the insured person passes away.

But if the policy pays the death benefit to the covered person’s estate, rather than a beneficiary, it’s possible that the amount could be subject to estate tax.

Large estates worth $11.58 million or more (the 2020 threshold) can be subject to federal estate taxes. But few estates are that large. In 2018, just 0.19% of estates were subject to federal estate tax, according to a Tax Policy Center analysis of federal data.

When are life insurance premiums taxable?

While life insurance payouts generally aren’t taxable if you’re the beneficiary, it’s possible for some group life insurance premiums to be subject to federal income tax.

If your employer gives you group term life insurance coverage of more than $50,000 as a fringe benefit, you may have to include the premiums for that coverage in your income, less any contributions you made toward the plan during the tax year. But if the life insurance death benefit is for less than $50,000, you generally don’t have to include the premiums as income.

Next steps: Ways to protect life insurance proceeds

Life insurance is a way for you to help protect your loved ones financially after you’re gone. The simplest way to help them avoid paying tax on the payout from your life insurance is to name them as beneficiaries, rather than naming your estate.

But if your financial situation is complex, or your estate may be subject to estate taxes, it’s probably a good idea to consult a financial adviser or tax professional who can counsel you on ways to minimize tax impact, such as an irrevocable life insurance trust. And a life insurance specialist may be able to help you understand what life insurance products are best for your specific situation.

Relevant sources: IRS: Life Insurance & Disability Insurance Proceeds | IRS Publication 525: Taxable and Nontaxable Income (2019) | IRS: Estate Tax | IRS Publication 559: Survivors, Executors and Administrators (2019)

This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma. It has been updated for the 2020 tax year.

Tax brackets play a big role in determining how much federal income tax you must pay each year.

A tax bracket is a range of income that is taxed at a certain tax rate. There are seven brackets and seven federal income tax rates (10%, 12%, 22%, 24%, 32%, 35% and 37%), and it’s likely more than one will apply to your income.

The federal government makes annual inflation adjustments to tax brackets, so the 2020 federal tax brackets are slightly different than the tax brackets that applied to your 2019 taxes.

Here’s a look at 2020 federal tax brackets, how they work and how they can affect your tax calculations.

• What are the 2020 federal income tax brackets?
• How do tax brackets work?
• How tax brackets help with tax calculations
• How to lower your tax bracket and income tax rate
• Tax brackets for previous tax years

What are the 2020 federal income tax brackets?

Here are the 2020 federal income tax brackets by filing status.

How do tax brackets work?

Six of the seven tax brackets have a lower and upper threshold that define the income range covered by the bracket. For example, for single filers the 10% tax bracket begins at $0 and ends at $9,875 for the 2020 tax year. The seventh and highest bracket — 37% —  doesn’t have an upper threshold.

Status matters

Bracket thresholds vary depending on your filing status — single, married filing jointly/qualifying widow(er), married filing separately or head of household.

Filing status can make a big difference when it comes to your taxable income. For example, a single filer with taxable income of $80,000 would have a marginal tax rate (more on that shortly) of 22%. But a married couple filing jointly with the same taxable income would be in a lower tax bracket of just 12%.

That’s because bracket income ranges for married taxpayers who file a joint return are much farther apart than the brackets for the single, head-of-household or married-filing-separately statuses.

Only taxable income counts

Federal tax law allows certain types of income to be excluded from taxation.

For example, the Tax Cuts and Jobs Act of 2017 altered the tax code so that alimony may not be taxable, depending on when you divorced or separated. And if your employer pays you directly for child care, you may be able to exclude that amount from your taxable income. There are other instances, as well, and you can learn more in IRS Publication 525, Taxable and Nontaxable Income.

You can have multiple brackets and rates

The U.S. has a progressive tax system, meaning the higher your income, the more tax you’re likely to owe. It also means that if you earn enough, multiple brackets (and rates) may apply to your income.

For example, if you’re filing as a single person with $9,000 of taxable income in 2020, you’d only be subject to the 10% tax rate, since all your income falls within the lowest tax bracket.

But four tax rates apply if you’re a single filer with taxable income of $100,000, because portions of your income fall within the 10%, 12%, 22% and 24% income thresholds. Sound confusing? We know. Don’t worry, we’ll walk you through an example below.

How tax brackets help with tax calculations

Knowing which tax brackets and corresponding tax rates apply to your income can help you estimate your likely federal income tax bill for the year.

To calculate your tax, you multiply the tax rate for each bracket by the amount of your income that falls within that bracket. Then sum up each tax bracket and rate that’s more than 10% to get the total amount owed.

Here’s an example.

What’s your marginal tax rate?

The highest tax rate that applies to your income is called your marginal tax rate. So in the example above, the single taxpayer’s marginal tax rate is 22%, because that’s the rate that corresponds to the highest bracket that applies to their taxable income.

Identifying your marginal tax rate can help you understand the potential tax impact of earning more money or taking certain tax deductions. Keep in mind that a marginal tax rate of 22% doesn’t mean you’re actually paying 22% tax on all your income.

Effective tax rate can be a more accurate way to think of your tax liability.

What’s your effective tax rate?

Effective tax rate is your total income tax obligation divided by your taxable income. For example, if your 2020 federal income tax bill is $14,338.50 and your taxable income is $84,000, your effective tax rate is 17%.

If you’re a single filer, taxable income of $84,000 would mean the 10%, 12% and 22% tax rates apply to portions of your income, and your marginal tax rate is 22%. But your effective tax rate — the percentage of your income that you’re actually paying in taxes — is lower than the highest rate that applies to your income.

How to lower your tax bracket and income tax rate

To lower your tax bracket, the tax rates that apply to your income, and — possibly — the amount of your tax obligation, you’ll need to reduce your total taxable income.

One way to do that is by using tax deductions, which can help reduce your tax liability.

There are three types of deductions.

• Standard deductions: The standard deduction is a set amount that you can deduct from your taxable income. Standard deduction amounts for 2020 are $24,800 for married couples filing jointly, $18,650 for heads of household, and $12,400 for single filers and married individuals filing separate returns.
• Itemized deductions: If you have expenses that add up to more than the standard deduction amount for your filing status, you may choose to itemize deductions instead. How much a deduction might save you depends on your marginal tax rate. Typically, you must itemize on your 1040 form to take deductions such as a medical expense deduction, property tax deduction or home mortgage interest.
• Above-the-line deductions: These are deductions you can claim in addition to the standard deduction and without itemizing deductions on your 1040 tax return. They typically include educator expenses (if you’re a teacher), contributions to health savings accounts, some retirement plan contributions and interest you paid on qualifying student loans.

If you’re looking to reduce your tax bill, you can also look at tax credits you may be eligible for. A tax credit is a dollar-for-dollar reduction in the amount of tax you owe, and if refundable, can even get you a bigger refund. But take note that credits won’t affect your tax bracket — instead they affect your total tax bill after tax brackets come into play.

Tax brackets for previous tax years

Next steps

Knowing which tax brackets and corresponding rates apply to your taxable income can help you get an idea of how much federal tax you might owe in a year. And knowing how much you might owe could allow you to make adjustments accordingly throughout the year — to either avoid a big tax bill when you file if you’re paying too little or to keep more money in your pocket if you’re overpaying.

Relevant sources: IRS Rev. Proc. 2019-44 | IRS Publication 525: Taxable and Nontaxable income (2019) | IRS: Credits and Deductions | IRS Rev. Proc. 2018-57 | IRS Rev. Proc. 2017-58

This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma. It has been updated for the 2019 tax year.

Political campaigns from national down to local rely on contributions to operate. So you might feel that you deserve a tax break when you support the democratic process by making a campaign contribution.

But the federal tax code doesn’t allow you to take a deduction for any political donations you make. And the same is true for most states that have a state-level personal income tax.

Let’s look at why political contributions are largely nondeductible, and some alternative deductions that you might be able to take instead to help reduce your tax bill.

• Why can’t I deduct a political contribution?
• What counts as a nondeductible political contribution?
• Can a business deduct political contributions?
• Can I deduct political contributions on my state income tax return?
• So what can I deduct on my federal tax return?

Why can’t I deduct a political contribution?

While you might think a political donation should fall under the category of a charitable contribution, that’s not what the tax code says. In fact, the IRS specifically calls out political donations as something you can’t take as a charitable deduction on your federal return.

That’s because political parties, organizations and candidates aren’t considered charities (referred to as “qualifying organizations”) for purposes of federal income taxes. You can only take a charitable deduction for contributions to qualifying organizations such as …

• Religious organizations, including churches, synagogues, temples, mosques and others
• Federal, state and local governments, but only if your donation is solely for public purposes
• Nonprofit schools and hospitals
• Certain community service organizations
• War veterans groups

What counts as a nondeductible political contribution?

You can’t deduct contributions of any kind — cash, donated merchandise or expenses related to volunteer hours, for example — to a political organization or candidate.

Generally, individuals can’t deduct business entertainment expenses until the 2026 tax year, thanks to tax reform. And businesses are limited to deducting only a portion of the cost of business meals. But even before the Tax Cuts and Jobs Act of 2017, the federal tax code specifically prohibited taking an entertainment deduction for indirect political contributions.

That means you can’t deduct amounts you spent to …

• Advertise in a program for a political convention or any other publication if the proceeds benefit a party or candidate
• Attend a program if the proceeds benefit a party or political candidate

Can a business deduct political contributions?

The short answer is no. While businesses, business owners and self-employed people often have more tax deductions available to them than individual taxpayers, in this case the same rules that apply to individuals apply to businesses.

Businesses are only permitted to deduct charitable contributions made to qualifying organizations — and, as we stated earlier, political campaigns, organizations and individuals don’t qualify as charitable organizations.

Can I deduct political contributions on my state income tax return?

In most states, you can’t deduct political contributions, but four states do allow a tax break for political campaign contributions or donations made to political candidates. Arkansas, Ohio and Oregon offer a tax credit, while Montana offers a tax deduction. All four states have rules and limitations around the tax break.

Many of the states that don’t offer a deduction for political contributions follow IRS guidelines for deducting charitable contributions.

So what can I deduct on my federal tax return?

While you can’t take a deduction on your federal return for political contributions, the federal government offers many other deductions. Some can only be taken when you itemize deductions, but others are available even if you don’t itemize. Like all tax deductions, these write-offs can help lower your tax bill by reducing your overall taxable income.

Above-the-line deductions

Above-the-line deductions are adjustments to your gross income that help you calculate your adjusted gross income, which is the starting point for calculating your taxable income. Most above-the-line deductions are available whether you itemize or take the standard deduction.

Learn more about some above-the-line deductions.

• Student loan interest deduction: Can you take it?
• Educator expense deduction: What teachers need to know
• Tax deductible expenses for self-employed people
• Your IRA contributions and your taxes: Things to know

If you itemize deductions on Schedule A, there are even more opportunities to reduce your taxable income.

Deductions for homeowners

Home-related expenses can be among the biggest bills you pay each year. Fortunately, the federal government offers multiple tax deductions for homeowners.

Learn more about tax deductions for homeowners.

• Mortgage interest may be tax deductible
• Private mortgage insurance premiums may be deductible
• Buying a house: The tax impact of your new home
• Deductions for victims of natural disasters

Charitable contributions

Contributions to qualified charitable organizations may be deductible. In fact, starting for the 2020 tax year, you can take a charitable contribution deduction of up to $300 ($600 if married filing jointly) — even if you don’t itemize.

Learn more about taking a deduction for charitable giving.

• A tax deduction is one reason to make charitable donations
• How to make your charitable donations count

Medical and dental expenses

Itemizing deductions may also allow you to deduct qualifying medical and dental expenses, provided you meet the requirements for taking the deduction.

Learn more about the medical expense deduction.

• Medical bills that qualify for a medical expense deduction
• COBRA insurance costs may be tax deductible

State and local taxes

Federal tax law also allows a deduction for certain types of state and local taxes, including property taxes and income taxes or sales taxes.

Learn more about SALT deductions.

• Sales tax deduction: What to know
• Challenging property taxes to help defray limits on SALT deduction

What’s next?

If you’re looking for a deduction you can take to help lower your taxable income (and possibly your tax obligation), contributing to a political campaign isn’t usually the way to do it. But making a political donation is one way to be involved in the democratic process, so it can still be a worthy way to spend your money.

And if you’re looking for an easy way to make a political contribution, both Uncle Sam and some states provide opportunities directly on your tax return. On the federal Form 1040, you can opt to contribute $3 per taxpayer to the Presidential Election Campaign without reducing your refund or increasing your tax obligation.

Relevant sources: IRS Publication 526: Charitable Contributions (2019) | IRS: Five Facts about Charitable Contributions | IRS Publication 463: Travel, Gift and Car Expenses (2019) | Tax Cuts and Jobs Act of 2017 | Cornell Law School Legal Information Institute: Internal Revenue Code | IRS: Credits and Deductions for Individuals | IRS: Definition of Adjusted Gross Income | IRS: About Schedule A (Form 1040 or 1040-SR) Itemized Deductions | IRS Publication 530: Tax Information for Homeowners (2019) | IRS: Charitable Contribution Deductions | IRS Topic No. 502: Medical and Dental Expenses | IRS Topic No. 503: Deductible Taxes | Alabama Form 40 Booklet (2019) | Hawaii Resident Income Tax Instructions (2019) | Maryland 2019 State and Local Tax Forms and Instructions | Form 1040 U.S. Individual Income Tax Return (2019)

If you have a 401(k) from a past job, you may be tempted to cash it out. But just because you can doesn’t necessarily mean you should.

You may consider cashing out an old 401(k) for a number of reasons — to cover an unexpected expense, fund a big purchase or just to make a clean break from a past employer.

But the tax impact of withdrawing money from a 401(k) can be significant, especially if you’ll be subject to early withdrawal penalties in addition to federal income taxes. Plus, when you take money out of a 401(k), those funds are no longer helping you grow your retirement savings.

Let’s look at some details about cashing out a 401(k), including reasons why it should only be considered as a last resort.

• Can I cash out my 401(k)?
• Taxes and penalties: The cost of cashing out
• What are exceptions to the early withdrawal penalty?
• What are some alternatives to cashing out a 401(k)?

Can I cash out my 401(k)?

When you cash out a financial account, including a 401(k) retirement account, you basically withdraw all the money in the account.

Because 401(k)s are employer-sponsored retirement accounts, withdrawal rules can vary a bit. But generally, you can only withdraw money from a 401(k) — including cashing it out — after you’ve left the employer that sponsored the account.

Of course, there are exceptions. If you become disabled, experience a financial hardship or reach age 59½, you may be able to take money from your 401(k) without penalty. But you’ll still have to pay federal income tax on the amount you withdrew, which the IRS refers to as a distribution.

How can I cash out a 401(k)?

Provided you’re eligible to make a 401(k) withdrawal, you’ll need to follow the plan administrator’s rules for requesting one. You may be required to have an online account, speak to a representative directly or complete some necessary paperwork to make the withdrawal.

Contact your plan administrator for guidance.

How long does it take to cash out a 401(k)?

Taking money out of a retirement account is a process. The Consumer Financial Protection Bureau notes that it could take several weeks to complete a withdrawal.

How long it takes to get your money will depend on the plan administrator — each one could have its own rules and time frame for making distributions. When you submit your withdrawal request, you may be able to ask the plan administrator for an ETA on the money.

Taxes and penalties: The cost of cashing out

One of the many reasons 401(k)s make attractive retirement savings vehicles is that you don’t have to pay tax on the money you contribute to them. Instead, you pay tax when you take money out of a 401(k).

If you wait until you retire to withdraw money, you could be in a lower tax bracket than when you were working, so you’d likely pay less tax on the money.

But if you make an early withdrawal (one taken before you’re 59½), IRS rules generally require the plan administrator to withhold 20% of the distribution for federal income taxes. Plus, your early withdrawal could be subject to an additional 10% penalty.

Here’s an example of how taxes and penalties could eat into a cashout amount.

And the tax impact may not end at 20%, since withdrawals are taxed as ordinary income. If your marginal tax rate is higher than 20%, you could end up owing more tax when you file your federal income tax return for the year in which you made the withdrawal.

What are exceptions to the early withdrawal penalty?

While the 10% penalty generally applies if you take money out of a 401(k) early, the IRS allows some exceptions for financial hardship. If you meet all the qualifications, and your employer allows hardship withdrawals, you may be able to take a hardship distribution without penalty to cover certain expenses.

• Medical care (for yourself, a spouse or a dependent) that would be allowed as a medical expense deduction, regardless of whether you actually take such a deduction
• Costs directly related to buying a principal residence, excluding mortgage payments
• Paying tuition and college expenses, including room and board, for yourself, a spouse, your children or other dependents
• Making payments to prevent eviction from, or foreclosure, on your home
• Funeral expenses
• Expenses related to repairing damage to your home caused by a qualifying disaster

And, earlier in 2020, the federal government made provisions in the Coronavirus Aid, Relief and Economic Security Act to allow people affected by COVID-19 to draw on their retirement accounts, including 401(k)s. More on that here.

What are some alternatives to cashing out a 401(k)?

You have other options for what to do with money sitting in an old 401(k) — ones that, if done right, won’t leave you facing taxes and penalties.

If you need money: The 401(k) loan option

If you urgently need money and you’ve exhausted other options, you may be able to take a loan from a 401(k), provided the sponsoring employer permits loans. The IRS has some rules for how 401(k) loans can work.

• You can borrow up to 50% of your vested balance up to a maximum of $50,000.
• You have to repay the loan within five years, unless you used the money to buy your main home.
• You must make regular, substantially equal payments, at least quarterly, over the repayment period.

If your loan meets all the above criteria, you won’t have to pay tax on the amount you borrowed.

The keep-it-growing option: Rollover to another retirement account

Maybe you don’t like the idea of leaving your retirement account with a past employer, or you have another retirement plan with investment options you like better. You can move the funds in your old 401(k) into another retirement account, such as an IRA or — if your current employer offers one — a new 401(k). This is called a rollover, and there are different kinds of rollovers.

With a direct rollover, the administrator of your old 401(k) transfers the money directly into your new eligible retirement plan. When you do a direct rollover, the administrator isn’t required to withhold 20% for taxes.

If you choose a 60-day rollover, the 401(k) funds get distributed to you, tax will be withheld and you have 60 days to put the money into a new retirement account. Here’s the catch: In order to avoid the 10% early withdrawal penalty, you’ll need to deposit the full amount you withdrew from the old plan into the new one, so you’ll have to use other funds to make up the amount withheld for taxes.

Bottom line

Cashing out an old 401(k) should be considered as a last option. Not only will you owe federal taxes on the amount you withdraw, you may also face state income taxes if you live in a state that has an individual income tax. With potential penalties, the inevitable tax impact and loss of future growth, you should never cash out a 401(k) without a compelling reason for doing so.

Explore alternatives, such as rollovers and a 401(k) loan. And if you must take money out of a retirement plan to deal with economic hardship caused by the pandemic, try to take advantage of the extra time to repay the withdrawal.

Relevant sources: IRS: 401(k) Resource Guide – Plan Sponsors – General Distribution Rules | Consumer Financial Protection Bureau: Considering an early retirement withdrawal? CARES Act rules and what you should know | IRS: 401(k) Plans | IRS Publication 575, Pension and Annuity Income (2019) | Coronavirus Aid, Relief and Economic Security (CARES) Act | IRS: 401(k) Resource Guide – Plan Participants – General Distribution Rules | IRS: Rollovers of Retirement Plan and IRA Distributions | FINRA: CARES Act 2020: Retirement Fund Access and Student Loan Relief | IRS: Coronavirus-related relief for retirement plans and IRAs questions and answers

The average car loan amount is high.

You might be fine with your car payment amount when you drive the car off the lot. But financial hardships like fluctuating income, a job loss, unexpected medical bills or emergency expenses at some point could make it difficult to manage a car payment.

When that happens, you may look for auto loan debt relief. Here are some options and things to consider.

1. Talk to your lender and ask for help
2. Refinancing an auto loan: Things to know
3. Selling or trading when you still owe
4. The impact of car loan default
5. What to know about repossession

Talk to your lender and ask for help

Auto loan lenders really don’t want you to default, which is why they consider your credit history (how well you repaid credit in the past) when deciding whether to lend you money to buy a car. If financial difficulties have you struggling to make your car payments, it’s a good idea to contact the lender to see if you can negotiate an affordable payment plan.

What’s more, during economic downturns, some auto lenders offer hardship programs, like auto loan deferment, to help borrowers stay afloat until circumstances improve. Just keep in mind that interest charges will continue to accrue on your loan during the deferral period, and you may end up paying more in interest on your loan.

Can I get auto debt relief from my lender?

• How to get out of a car loan when you’re upside down
• Learn about debt relief options

Refinancing an auto loan: Things to know

Refinancing a car loan — paying off your current loan with a new one — can be a good way to lower your monthly payment. Refinancing may help you get a lower interest rate. Or you might be able to get a longer repayment period, which could help lower your monthly payment. Just be aware that stretching out your loan term could mean you end up paying more in interest over the length of the loan.

If possible, try shopping for a refinance deal before financial hardship affects your credit. Generally, good credit scores and good credit history can make it easier to secure a loan with a lower interest rate and better terms.

Should I refinance my car loan?

• When should I refinance my auto loan?
• When refinancing a car loan may make sense
• How to refinance a car loan in five steps
• How to refinance a car loan when you have bad credit

Selling or trading when you still owe

Another option for reducing or even eliminating a car payment could be to sell or trade in your car. If you sell it yourself rather than trade it in at a car dealership, you may be able to get more money for your vehicle.

Trading in your current vehicle to get out of a big car payment probably only makes sense if your credit is good and you don’t owe more on your loan than the value of the car (known as being upside down). If you’re upside down, you may be able to trade your current car for a less expensive car or for one with lower financing costs — but it’s also likely the balance of your old loan will get rolled into your new car loan. That can increase the risk of your new auto loan also becoming upside down.

Should I trade or sell my car to get out of the loan?

• How to sell your car
• How to trade in a car
• How to trade in a car when you’re still paying off the loan
• What to know about negative equity on a car trade in

The impact of car loan default

When you stop making car loan payments, your auto loan can go into default. Defaulting on a loan can harm your credit.

Rules for when an auto loan is considered in default can vary by state and by lender. But the outcome could be the same — the lender takes back the vehicle, your credit takes a hit and you may still owe your lender money.

It’s probably a good idea to do everything you can to avoid defaulting on an auto loan.

What can I do about a loan that’s in default?

• Tips if you’re facing an auto loan default
• The risk of subprime loan default

What to know about repossession

If you fall behind in making car payments, your lender likely has the right to take the vehicle from you. How soon a financial institution can repossess your vehicle after you miss a payment, and whether it must notify you first, varies by state.

You may think that letting the lender repossess the car or giving your car back voluntarily before it’s repossessed will solve your payment problems. But there could be significant financial repercussions down the road.

Late payments, missed payments and repossessions can appear on credit reports. And if your lender decides to sell your repossessed car to get back some of the money you owe, it could still take you to court to force you to pay any deficiency balance — the difference between the remaining balance on your car loan plus repossession costs, and what your lender earned from the sale of your repossessed car.

Is repossession the best option for me?

• How repossession can affect credit
• What to know about voluntary repossession

Next steps

If your monthly car payment has turned into a financial hardship, it may be possible to find some auto loan debt relief. Contacting the loan company and asking for help should probably be your first step — and repossession likely should be your last resort. But no one solution is right for every financial situation, so be sure to explore all your options.