What If?
Tax season brings lots of questions. Here are some answers.

Employment and Unemployment

What if I’m out of work? Do I have to file taxes?

You’re not alone. Nearly 2.6 million jobs were lost in 2008, the highest rate since 1945. As the year closed, the Labor Department tells us, the unemployment rate was at 7.2%, which means that 1 out of every 14 American workers shares your trouble.

In fact, more people than any year in recent history are dealing for the first time with the double whammy of being out of work and having to file taxes. But, as hard as it seems, most must indeed file tax returns. Some general guidelines: If you received a W2 from any employer and made $8,950 or more— or if you’re self-employed and made at least $400— you’ll need to file a return.

Not to mention, if you’re expecting a refund, you won’t get it without filing!

As with many topics discussed here, each situation is different, and we encourage you to discuss your particular tax situation with a CPA.

What if I received unemployment?

A surprising number of (usually very disappointed) people aren’t aware that unemployment benefits are subject to tax. You can ease the blow by having taxes taken out automatically, before you receive the payments (just like we do with paychecks). But the reality is that most people who are out of work prefer to receive as much money in-hand as possible. That’s understandable, as long as you’re prepared to pay all the taxes on your unemployment by April 15 of the following year.

What if I had to take money from my 401(k)?

Withdrawals from a 401(k) are considered income, and are therefore taxable. What’s more, if you’re younger than 59½ you’re also subject to a 10% early-withdrawal penalty. If your 401(k) provides a loan option, taking advantage of that option eliminates the taxes and the early 10% penalty withdrawal. The downside of this is depending on your plan document you may not be able to participate in the plan until the loan is re-paid.

What if I had to take money from my IRA?

Just as above with the 401(k), taxes have to be paid, and if you are younger than 59½ there will be a 10% penalty. A better option may be what is known as a 72T transaction. This allows you to take the same annual withdrawal from your IRA either for 5 years or to your age 59½, whichever is later; taxes have to be paid, but no penalty will be assessed. For more information on the 72T please contact us.

What if I freelanced or did odd jobs while looking for a permanent job?

It’s your responsibility to report all income. If you earned more than $600 from any employer, expect a 1099, which you’ll be expected to file with your returns.

What if I have expenses related to my job search?

Depending on the extent of the search, this could really ease the tax bite. For example, all of the following are usually deductible:

• Creating, printing, and mailing resumes,
• Fees for a career coach or headhunter,
• Search-related phone calls,
• Search-related transportation, parking, and tolls, and
• Search-related meals and lodging.

Homeownership

What if I just bought my first home?

You’re in luck: The IRS has rolled out a new $7,500 credit for first-time home buyers. The credit, however, acts more like a no-interest loan because it must be repaid to the government over 15 years. The details are more than we can discuss here, but see IRS.gov if this applies to your case.

What if I had trouble making my mortgage payments?

It used to be that any debt that your lender forgave (that is, by lowering the balance of your mortgage) was taxable as income. The Mortgage Forgiveness Debt Relief Act of 2007 changed this. If the house was your principal residence and the balance of the mortgage was less than $2 million, the transaction may be tax free. IRS Form 982 has more details.

Other Topics

What if I have kids in college?

The deduction for qualified education expenses was set to run out on December 31, 2008, but it’s been extended. You can still deduct up to $4,000 for tuition and many college fees.

What if my business lost money last year?

It used to be that operating losses could be carried over a two-year period. Congress recently extended this to a five-year period.

What if my taxes aren’t that complicated?

If you think you’ll just need to file a 1040 with a W2 and standard deductions, consider doing the filing yourself. The IRS’s website now offers FreeFile, which allows anyone, regardless of income, to file online for free. In fact, if your income is less than $56,000, you may be eligible for step-by-step help through the process with one of the companies that have partnered with the IRS on this project.

What if I need my refund as quickly as possible?

Consider e-filing, either through your paid preparer or through IRS.gov. According to the IRS, e-filers will get their refunds in as few as 10 days, rather than the six to eight weeks it often takes using paper forms and checks.

What if the IRS sends me an email?

Make sure it’s really from the IRS! During tax season, related Internet scams abound, so be careful what you click on. The IRS’s official site ends in .gov (“dot gov”), so delete anything from any supposed IRS site ending in .com, .net, .org or any other designations besides .gov.

What if I had an increase in my income last year?

Good for you! However, you may be vulnerable to the Alternative Minimum Tax, or AMT. Be sure to read the related article in this issue of the New Retirement.

Give us a call today at 1-800-450-0629 to find out how we can help.

Sources: IRS, U.S. Labor Department.