Cost of living increases will affect dollar limitations for pension plans and other retirement-related items for Tax Year 2012.

What does this mean?
The IRS uses a cost-of-living index to determine contribution and compensation levels for pensions and retirement plans, like the 401k. When the index meets a threshold, it triggers their adjustment. For the 2012 tax year, limits are being increased to match the rise in the index. Taxpayers should be aware that other limitations will remain unchanged. Here are the highlights of the 2012 Tax Year changes: More on Tax Year 2012 Pension Plan Changes

Losing your job is always a traumatic experience and certainly brings on some fiscal difficulties.  However, losing your job may open new opportunities for you in the future.

But when you lose your job you could be for some tax surprises - some are good and are downright nasty. 

With a loss of a job, situations such as unemployment benefits, severance pay, cash in a retirement account or having a big change in income could increase or decrease your tax liability. Here are a few tips to avoid any surprises.

Unemployment checks
Unemployment benefits are subject to federal income tax, but not Social Security or Medicare taxes. Some states tax unemployment benefits so find out the implications in your state.

Retirement plans
If you can, avoid taking money out of a 401(k) plan or individual retirement account. You could lose a big chunk of it to taxes and penalties and the amount you withdraw will be added to your income, which could push you into a higher tax bracket.

Specifically, you will owe federal and state income tax on the amount withdrawn.

One exception: If you are withdrawing from a 401(k) or other workplace plan, you can avoid the 10 percent penalty if you are 55 or older when you leave that employer. In general, taxes and penalties might take as much as 50 percent of your distribution right of the top - this percentage varies from state to state but expect to pay at least forty percent.

Severance pay
Severance pay is subject to federal and state income taxes, plus Social Security and Medicare taxes.

The standard withholding rate on severance is 25 percent for federal income tax. States set their own rates; again, that might be more or less than you need to cover your actual tax liability.

If you received a big severance check in late 2008 on top of your regular income, it could push you into a higher tax bracket and jeopardize some tax breaks.

Possible silver lining
If severance pushes your annual pay over the Social Security wage base ($102,000 in 2008 and $106,800 in 2009), the amount over the wage base won’t be subject to Social Security tax.

If your income grows: A big severance package or retirement-plan withdrawal could push you into a higher tax bracket. You also could lose some of the tax breaks that phase out as your income grows. The phase out range is different for each tax break, so it’s hard to generalize.

But you could lose a portion of your itemized deductions and the personal exemption you get for each member of your family.

Medical expenses and miscellaneous expenses
Expenses such as investment and tax-preparation fees, unreimbursed business expenses and job-hunting costs are not deductible until they exceed a certain percentage of your adjusted gross income, so if your income jumps, they become harder to get.

You also could lose deductions for an IRA contribution, college tuition and the Hope and Lifetime Learning credits.

If your income shrinks: On the flip side, if your income shrinks after a layoff, your tax rate could fall and you could become eligible for more tax breaks.

For example, out-of-pocket medical expenses are deductible after they exceed 7.5 percent of adjusted gross income.

If your income is $60,000, any medical expenses over $4,500 would be deductible.

But if your income shrinks to $20,000, you could write off any medical expenses over $1,500.

If you have to start paying for your own health insurance, you could easily exceed the threshold because premiums count toward your medical expenses.

To claim medical expenses, you must itemize your deductions. If you haven’t been keeping receipts, start doing so.

Job-search expenses
You might be able to deduct job-search expenses if you are looking for a job in the same occupation, even if you don’t get one.

Qualified expenses
Expense including printing and mailing resumes, job counseling and employment agency fees, phone charges related to your job search, and unreimbursed travel to and from interviews are deductible.

Add these to your other miscellaneous expenses. If the total exceeds 2 percent of your adjusted gross income, you can deduct the portion over 2 percent as an itemized deduction.

You cannot deduct expenses if this is your first real job  or you’ve been out of work for a long time.

Stimulus Checks
Some people didn’t get a stimulus check last year because their 2007 income was too high. If your income dropped last year because you lost your job, you might be able to claim the amount when you file your 2008 taxes.

The economic times continue to raise the unemployment rate throughout the United States.  The best advice is to prepare for the worse and expect the best.  So try to put some cash on the side to hold you over if the inevitable happens to you.

soruce: sfgate.com

Because of the complexity of IRS tax laws, owing taxes on mutual funds happens more than one would think.  It occurs when a fund manager sells a stock, or other asset, that is held within the fund, for a gain.  The taxable capital gains are passed on to the owner of the fund. 

Let’s say you own ABC Fund and the manager bought shares of Google @ $200/share and six months later sold it for $300/share.  Initially this looks great.  The manager made money for the fund.  But mutual funds are made of many different stocks and if the value of the other shares “in the basket” cause the price of the fund to decline - then you sell it at a loss - you would be required to pay capital gains on the capital gains of the google sale.

Although this is a simple example, it is important to understand if you own a mutual fund.  If you are concerned or want to know more about mutual fund tax implications, contact your financial adviser or tax accountant.