10 Tips for Taxpayers Hit by the Recession
For many tax filers, this tax season may be unlike any other.
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If you’ve lost your job, are searching for a new one or attempting to strike out on your own, your tax return may be affected. The same is true if you are collecting unemployment, lost your home in foreclosure or tapped your retirement accounts early.
These tough financial times, in fact, are raising so many, and so varied, tax-related questions that the Internal Revenue Service has set up a special section on its Web site addressing them: What if I lose my job? What if I can’t pay my taxes? What if my income declines?
The answers to these questions could change your usual strategy, which is why many of you need to take extra care when doing your taxes this year. And if there’s any silver lining to earning less money, it may be that you’re more likely to qualify for the many tax breaks that come with limits on how much you can earn to claim them.
Indeed, taxpayers who earned too much to collect the stimulus checks mailed out last year — but have watched their income decline or disappear altogether since then — may have a chance to collect the extra cash now.
When every dollar counts, you want to be sure to take advantage of all breaks available. Below are 10 tips for tax filers feeling the ill effects of the recession:
1. UNEMPLOYMENT The good news is that unemployment benefits were extended last year. The bad news is that those benefits are taxable. Your tax bracket is based on total income, including any money earned before you were laid off. “That catches a lot of people off guard,” said Mark Steber, vice president of tax resources at Jackson Hewitt. You should receive a 1099-G that will show what you received from unemployment and any tax you elected to have withheld. If you didn’t elect to withhold taxes, you may owe them now. Severance and pay for vacation or sick time is also taxable.
2. MORE DEDUCTIONS When you income drops, you’re more likely to qualify for certain tax breaks that phase out if you earn too much money. Tax professionals said that more people are qualifying for the Earned Income Tax Credit, which is aimed at working people and families with low incomes: a married couple filing jointly with two children and an adjusted gross income less than $41,646 in 2008 may be eligible for a maximum tax credit of $4,824. The credit is refundable, which means that even if you do not owe any taxes, you’ll receive the credit in the form of a check from Uncle Sam.
If you’re on the hunt for a new job, many of your costs may also be deductible, as long as you itemize your deductions instead of taking the standard deduction. Deductible expenses include résumé paper, printing, travel expenses, long-distance calls and faxes, postage, even meals and lodging expenses. But job expenses are considered a miscellaneous deduction, which means you can only deduct costs that exceed 2 percent of your adjusted gross income. Since other expenses can also be included in the miscellaneous bucket — from tax preparation fees to work uniforms — be sure you’re including them all, said George Jones, a senior tax analyst at CCH.
If you need to relocate for a new job, moving expenses are deductible for all taxpayers, as long as your new job is located at least 50 miles farther from your old residence than your old job was.
A smaller paycheck will also make it more likely to qualify for the medical deduction: Medical expenses, including health insurance costs, exceeding 7.5 percent of your adjusted gross income are deductible, as long you itemize.
And more taxpayers are also likely to qualify for the child tax credit, the additional child tax credit, as well as the Saver’s Credit, which allows some I.R.A. and 401(k) plan participants to reduce their tax bill by up to $1,000 — even though they’ve already received a tax benefit by excluding their contribution amount from their gross income. But to qualify, married couples filing jointly need to have adjusted gross income of $53,000 or less, according to CCH.
3. REBATE Remember the stimulus checks distributed last year in an attempt to jump-start the economy? If you earned too much to qualify, but your income dropped last year (or you had a child), you may still have a chance to claim it (or more of it). Here’s why: Since the government wanted to get the money into people’s hands quickly, eligibility was based on taxpayers’ 2007 tax returns. But taxpayers have the chance to claim the Recovery Rebate Credit — or a larger portion of it — based on their 2008 income if they didn’t receive the maximum amount.
Single taxpayers with incomes of less than $75,000 will get the full $600 credit, though people with incomes up to $87,000 will receive a reduced amount. Married taxpayers filing jointly with income up to $150,000 will qualify for the $1,200 check, though it phases out completely at $174,000, according to Mr. Jones. You can claim the rebate on line 70 of your 1040 tax return.
4. DISCHARGED DEBT Normally, if a portion of your mortgage debt is forgiven, the amount erased is considered taxable income. But Congress has temporarily lifted that rule for debts wiped out on your primary home. So if your lender restructured your loan and reduced the amount, or you had debt forgiven as part of a foreclosure, you will not owe taxes on that amount — up to $2 million, or $1 million for married people filing separately — as long as the debt reduction occurred from 2007 to 2012, according to Mr. Jones.
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