Tax Tips For Troubled TImes

What if I lost my job?
Severance pay and unemployment compensation are taxable. Payments for accumulated vacation or sick time also are taxable. To avoid a big tax bill, taxpayers should ensure that enough taxes are withheld from these payments or make estimated tax payments. Public assistance and food stamps are not taxable.
Tax tip: Severance pay is taxed at the same rate as regular income. When combined with regular wages, severance pay can result in a higher tax bracket.

Do I need to report unemployment compensation?
Unemployment compensation must be included in income. It is taxable income. People who received unemployment compensation should receive Form 1099-G showing the amount the taxpayer was paid and any federal income tax that was withheld.
Tax tip: Virginia does not tax unemployment benefits.

What happens if my income declined?
You may be eligible for tax credits. 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 to claim the credit.
Tax tip: The maximum adjusted gross income to qualify for the Earned Income Credit for a couple, married filing jointly, with two children is $41,646.

Can expenses be deducted for job searches?
Taxpayers may be able to deduct certain expenses while looking for a new job, even if they do not get a new job. Expenses include travel and résumé costs and employment agency fees. Moving expenses for a job at least 50 miles away are deductible.
Tax tip: Taxpayers can not deduct job search expenses if they are looking for jobs in new occupations nor can they take the deductions if they have never been employed.

What happens if my employer went out of business or is in bankruptcy?
Employers must provide a 2008 Form W-2 showing employee wages and withholdings by Jan. 31. If an employer fails to provide a W-2, contact the IRS for a substitute Form W-2.
Tax tip: If an employer liquidated a 401(k) plan, taxpayers have 60 days to roll their plans to another qualified retirement plan or IRA.

What must I do if I closed my business?
The taxpayer responsible for the business must file all required tax returns by the due dates, even if the business is no longer operating. If the company had employees, employment tax returns must be filed. If the business owner is unable to pay in full, immediately contact the IRS to discuss options.
Tax tip: Just about everything you need to know for starting, operating or closing your business can be found at http://www.irs.gov/businesses/index.html.

What happens if I withdrew money from my IRA?
Early withdrawal from an Individual Retirement Account before age 59½ is subject to being included in gross income plus a 10 percent tax penalty.
Tax tip: Exceptions to the 10 percent penalty include using IRA funds to pay medical insurance premiums after job losses.

What if my 401(k) dropped 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.
Tax tip: For more information, see Publication 575, Pension and Annuity Income.

What happens if I sold stock at a loss?
You can claim capital losses on investments that were actually sold up to $3,000 a year. Losses in excess of $3,000 are carried forward indefinitely until the loss is depleted or used to offset future gains on investments that are sold.
Tax tip: Losses on the tax deferred portion of individual retirement accounts, pensions and annuities generally are not deductible since the taxpayer has not paid tax on the money.

What if I lost my home through foreclosure?
Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers generally can exclude income from the discharge of debt on their principal residence or mortgage restructuring.
Tax tip: This exception does not apply to second homes or vacation homes.

What if I sold my home for a loss?
Losses from the sale of personal-use property, such as a home or car, are not deductible.
Tax tip: These losses are not eligible for capital gains losses.

Do I get a credit if I bought a home as a first-time buyer?
The First Time Homebuyer Credit operates like an interest-free loan. It must be repaid over 15 years. The credit is 10 percent of the purchase price of a home, with a maximum available credit of $7,500. It is available for people who bought houses after April 8, 2008.
Tax tip: The credit is phased out for taxpayers with adjusted gross income of more than $75,000 or $150,000 for joint filers. If you built the home, the purchase date is the first date you occupy it.

What happens to my returns if I am insolvent?
A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. Generally, an insolvent taxpayer is not required to include forgiven debts as income.
Tax tip: For more information, see highlights of the Mortgage Forgiveness Debt Relief Act.

What happens if I filed for bankruptcy protection?
Debts discharged through bankruptcy are not considered taxable income. If an individual debtor files for bankruptcy under chapter 7 or 11, a separate "estate" is created consisting of property that belonged to the debtor before the filing date. This bankruptcy estate is a new taxable entity, separate from the individual taxpayer.
Tax tip: Some tax debts are not discharged in a bankruptcy.

Above information is made up of edited responses from the IRS Web site with input from Shiela Clark, operations director at Peoples Income Tax tax-preparation service in Richmond, Va., and Richmond tax experts Jim Young with the AARP and Tom Turner, a certified public accountant with Dooley & Vicars.