Tax Time: When the Financial Crisis Hits Home
Sunday, February 15, 2009; 12:00 AM
With the economy going from bad to worse and impacting more people, the IRS is providing additional resources to help you wade through tax season. Here are a few of the IRS publications and links that will help answer your questions.
* Severance pay and unemployment compensation state must be included in your income. They are taxable income. (See Publication 525).
* Payments for any accumulated vacation or sick time also are taxable.
* Public assistance and food stamps are not taxable.
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 out-placement agency fees. Moving costs for a new job at least 50 miles away from your home may also be deductible. See Publication 529 (pdf) for more details.
If you were one of the many people who filed for bankruptcy this year, the debts you discharged through bankruptcy are not considered taxable income. If you filed for bankruptcy under chapter 7 or 11 of the Bankruptcy Code, a separate "estate" is created consisting of property that belonged to you before the filing date. This bankruptcy estate is a new taxable entity, completely separate from you as an individual taxpayer. Please note, however, that some tax debts are not dischargeable in a bankruptcy action. Publication 908 (pdf) explains how bankruptcy will effect filing your taxes. The IRS provides additional answers here.
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. This exception does not apply to second homes or vacation homes. In some cases, you may be able to file an amended tax return for previous tax years. Click here to get a detailed look at how the IRS will deal with foreclosures. Read Publication 4681 (pdf) to make sure you file correctly.
Generally, you can not claim a capital gains loss on your retirement accounts that already receive favorable tax treatment. The only time you would have a loss is when you receive a distribution that had previously been taxed. Publication 575 (pdf) offers more on the topic.
Inability to Pay Taxes
Don't panic. If you cannot pay the taxes you owe in full by the April deadline, you should still file your return by the deadline and pay as much as you can to avoid penalties and interest. You also should contact the IRS to discuss your payment options at 1-800-829-1040.