Tough Times: Thousands are having a difficult time financially in this economic climate. There are high tax impacts for events like job loss, debt forgiveness, and tapping into your retirement fund. But there is good news, like how a decrease in income could make you eligible for certain Tax Credits (like the Earned Income Tax Credit).
If you feel that you won't be able to pay your tax bill, you need to contact the IRS, a Tax Attorney, or a Tax Professional immediately. They'll have the steps you need to take to ease the burden. File your Return, even if you can't afford to pay so you can avoid additional IRS penalties.
IRS Publication 4763, Job Related Questions During an Economic Downturn can help you are the "What if" questions and scenarios and their possible Tax Impact. Here's a few key things to know from the IRS Publication.
Job Related "What If" Tax Issues
What if I lose my job?
The loss of a job may create new tax issues. Severance pay, unemployment compensation, accumulated vacation and sick time are taxable. Make sure taxes are withheld from these payments to avoid a huge bill come tax time. Luckily, Public Assistance and Food stamps are not taxable.
What if my income declines?
If you had a reduction in income in 2008 you may be eligible for some credits or deductions. For example, the Earned Income Tax Credit is available for working families and individuals. Eligibility is determined by income and family size. You must file an income tax return in order to claim EITC.
What if I am searching for a job?
You may be able to deduct certain expenses you incur while looking for a new job, even if you do not get a new job. Expenses may include travel, resume and outplacement agency fees. For more information, see Publication 529, Miscellaneous Deductions . Moving costs for a new job at least 50 miles away from your home may also be deductible.
What if I withdraw money from my IRA?
Generally, early withdrawal from an Individual Retirement Account (IRA) prior to age 59 1/2 is subject to being included in gross income plus a 10 percent additional tax penalty. There are exceptions to the 10 percent penalty, such as using IRA funds to pay your medical insurance premium after a job loss. For more information, see IRS Publication 590, Individual Retirement Accounts.
What if my 401(k) drops in value?
Generally, you can not claim a capital gains loss on your retirement accounts that already are receiving favorable tax treatment. The only time you would have a loss is when you receive a distribution that had previously been taxed. For more information, see IRS Publication 575, Pension and Annuity Income.
Final Tip: See Publication 4128 Tax Impact of Job Loss for more information. I'll continue to cover the Tax Debt "What Ifs" in later posts.