Lose a job? Take a pay cut? Make sure it's on your tax return.
Friday, January 28, 2011; 10:43 PM
If you had some major economic challenges in 2010, your tax situation may be different from in years past. So be more than a passive (or procrastinating) filer this year. Even if you use a professional preparer, which the majority of taxpayers do, or tax software, visit the Internal Revenue Service's Web site at www.irs.gov to see whether changes in your life could affect your tax return.
For example, what if you were laid off or took a major pay cut? Then you might be looking at a sizable tax refund because you could be eligible for credits or deductions you couldn't claim before. And if you're getting a refund, the Internal Revenue Service has unveiled IRS2Go. It's a smartphone app that lets taxpayers check the status of their refund.
What if you had to dip into your 401(k) or similar tax-advantaged retirement plan to pay for necessities after losing your job? You might not have realized that you could face tax consequences for tapping into this money, or maybe you did realize that you would be hit with a hefty tax bill but thought you'd just deal with it later.
Well, later is now.
I'm a fan of the IRS Web site's "What if" section, which answers questions from people in new tax situations. So let's go through a few.
What if I didn't earn much money last year? Should I file anyway? I have four words for you - Earned Income Tax Credit. But to receive this valuable credit, you have to file a return even if you don't have a filing requirement. The maximum credit for 2010 is $5,666 with three or more qualifying children. You could even get a maximum credit of $457 with no qualifying children. On the IRS site, search for "EITC Assistant" to find out whether you should claim this credit.
What if I was laid off? You might have been fortunate to get severance pay, but unfortunately, it's taxable. If you received payments for any accumulated vacation or sick time, this is also taxable. And unlike for the 2009 tax season, all your unemployment benefits go back to being taxable. (For the tax year 2009, taxpayers getting unemployment compensation could exclude the first $2,400 from their gross income.)
I hope you kept track of some expenses incurred while looking for a new job. You may be able to deduct some of those, such as resume preparation or travel expenses.
What if I'm getting a refund? You can now check the status of your federal refund if you have a smartphone. If you have an Apple iPhone or iTouch, you can download the free IRS2Go app by visiting the iTunes app store. If you have an Android device, go to the Android Marketplace.
"This new smartphone app is the next step in IRS's continuing efforts to provide services and information to taxpayers when they want, where they want," IRS Commissioner Doug Shulman said.
To use the refund app, you will have to know your filing status and the amount of your anticipated refund and enter your Social Security number, which will be masked and encrypted. Electronic filers will be able to check their refund status after just a few days. If you mail your return, it will take three to four weeks to get an update on the app.
What if I owe because of a 401(k) loan? If you borrowed money from your workplace retirement plan but lost your job before paying the loan back, generally (unless you qualify for an exception) the outstanding loan amount is subject to federal and state income taxes. Additionally, if you are younger than 591/2, you have to pay a 10 percent penalty for early withdrawal.
If you can't pay, don't panic. File your return anyway to avoid the penalty for not filing. Then contact the IRS to find out your options for repayment. Ask about a short-term extension to pay, an installment agreement or what's called an offer in compromise.
What if I had to shut down my small business last year? You still have to file an annual return for the year you go out of business. On the return, you have to check the box indicating that this tax return is your final one. To be sure you've covered everything, search the IRS site for "Closing a Business Checklist."
As much as we love to talk trash about the IRS, its Web site is useful and user-friendly. So inform yourself.
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