Taxes in hard times
You've lost your job and your mortgage company is threatening foreclosure. Then, when it seems like things can't get any worse, the tax man comes calling. What's a person to do?
Don't ignore the Internal Revenue Service.
"The most important thing for people to do even if they owe money is to go ahead and file that return," says Terry Lemons, senior spokesman for the IRS.
The average refund last year was $2,429. "That's a lot of money for people who are facing hardship," he said. "We encourage people to take a look at their taxes, file electronically and use direct deposit."
You can get your refund in 10 days that way, versus four weeks or longer if you file by mail.
In these tough economic times, taxpayers may find that they're due a larger refund than they expected.
The IRS considers taxation a "pay-as-you-go" system, said Bob Meighan, vice president for the Consumer Tax Group, part of Intuit Inc., which publishes the tax preparation software TurboTax. "Most Americans are current in tax liability as they are earning income."
But if your annual income declined because you lost a job or had other changes in your financial situation, your tax bill is likely to be lower and you could be due a larger refund.
You might find yourself eligible for a broad range of credits that you didn't qualify for before. Among them: the Earned Income Credit, education credits and the Recovery Rebate Credit.
The stimulus checks that people received last year actually were an advance payment on the Recovery Rebate Credit. Initial eligibility was determined based on 2007 tax returns.
If your financial circumstances changed, you may qualify for the rebate now, even if you didn't when the initial payments were made.
If you did get a check, you also may qualify for an additional credit if you added a child to your family in 2008.
Through 2008, Treasury processed more than 118 million stimulus payments totaling about $96 billion. The IRS expects about $10 billion in Recovery Rebate Credits in 2009.
The credits are $600 for those filing individually, $1,200 for joint filers and $300 for each child.
The Earned Income Tax Credit was designed to help low-income workers by offsetting part of their Social Security and Medicare taxes. Since it boosts take-home pay, it is meant to provide an incentive to work. The maximum income limit is $41,646. That declines based on filing status and the number of children in the household. The maximum credit for 2008 is $4,824, up from $4,716 in 2007.
Lemons says the IRS is paying close attention to the hard times and wants Americans to take advantage of every credit and deduction due them.
For those who owe back taxes, the IRS is offering some assistance.
"We need to ensure that we balance our responsibility to enforce the law with the economic realities facing many American citizens today," IRS Commissioner Doug Shulman said in a statement as the filing season began. "We want to go the extra mile to help taxpayers, especially those who've done the right thing in the past and are facing unusual hardships."
Taxpayers who lost a job, rely solely on Social Security or welfare, or who face "devastating illness or significant medical bills" may be able to have collection actions suspended.
For those facing financial hardship, missing a payment on an installment agreement with the IRS won't necessarily result in suspension of the agreement. The agency said people should call the IRS to discuss their situation.
The IRS has put together a series of answers to "What If" questions to help taxpayers in financial distress. They can be found on its Web site, at http:www.irs.gov/newsroom/article/0,,id
Don't forget, tax experts say, that unemployment insurance benefits are taxable as income. If you didn't opt to have federal or state income tax withheld or file estimated taxes, you could find yourself with a tax bill that you cannot pay.
"However, the expenses that you incur to find a job are deductible to the extent that you can itemize," provided you are not looking for a job for the first time, Meighan said.
People struggling financially also could find themselves with a bigger tax bill if they withdrew money from an Individual Retirement Account or 401(k) and didn't have taxes withheld. There also is a 10 percent penalty if you're under 591/2; years old, with a few exceptions. In addition, the amount you withdraw is considered income and is taxed. Depending on the amount withdrawn, it could push you into a higher tax bracket.
There's some help, though, for people who lost their homes to foreclosure and had their debt forgiven by their financial institution.
"When debt is forgiven, you potentially have a taxable event," said Jackie Perlman, senior tax researcher at H&R Block Inc. "... It's just as if someone gave you money to pay off your mortgage and that money is potentially income to you."
Under certain circumstances, you may not have to pay taxes on that forgiven debt. "It has to be your main residence, not a rental, not a vacation home," said Perlman.
Also, the forgiveness cannot be more than $2 million.
Economists have said the country entered into recession in December 2007. Compared to previous recessions, consumers are being hit particularly hard this time. The recession helped push about 2.25 million homes into foreclosure in 2008, according to Federal Reserve estimates. In December, the Mortgage Bankers Association said 1 in 10 American homeowners with a mortgage was in foreclosure or behind in payments. More than 10 million people are unemployed.
On the Net:
IRS Web site: www.irs.gov