Many taxpayers had difficult financial times in 2009. If you are one of the millions of Americans who lost your job, received unemployment compensation, received less income, searched for a job, closed your own business, withdrew money from your IRA or had a drop in value in your 401(k), they may be a tax impact on your federal income tax filing.

Here is a quick summary of “What If” scenarios and the possible tax impact on your federal income tax filing:

What if I lose my job?
The loss of a job may create new tax issues. Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time also are taxable. You should ensure that enough taxes are withheld from these payments or make estimated tax payments to avoid a big bill at tax time. Public assistance and food stamps are not taxable. The IRS has updated a helpful publication which lists a number of job-related tax issues.
Publication 4128, Tax Impact of Job Loss.

What if I receive unemployment compensation?
Unemployment compensation you received under the unemployment compensation laws of the United States or of a state must be included in your income. It is taxable income. If you received unemployment compensation, you should receive Form 1099-G showing the amount you were paid and any federal income tax you elected to have withheld.
See Publication 525, Taxable and Nontaxable Income.

Note: The American Recovery and Reinvestment Act temporarily will change the taxation of unemployment benefits for the 2009 tax year only. Under the new economic stimulus law, the first $2,400 of unemployment benefits received in 2009 will not be subject to federal taxes. The exemption will be reflected on those tax returns filed in 2010.

What If Your Income Declines?
There are many tax credits that are subject to income limitations. If you had a reduction in income this year you may be eligible for some credits or deductions. For example, the Earned Income Tax Credit is available for working families and individuals. Eligibility is determined by income and family size. You must file an income tax return in order to claim EITC.
Here is more info on the EITC.

What if I am 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 outplacement agency fees. For more information, see Publication 529, Miscellaneous Deductions . Moving costs for a new job at least 50 miles away from your home may also be deductible.

What if my employer goes out of business or in bankruptcy?
Your employer must provide you with a Form W-2 showing your wages and withholdings for the year by Jan. 31 of the following year. For example, if you were employed during 2009, your employer should provide you with a W-2 for 2009 by Jan. 31, 2010. You should keep up-to-date records or pay stubs until you receive your Form W-2. If your employer or its representatives fails to provide you with a Form W-2, contact the IRS and we can help by providing you with a substitute Form W-2. If your employer is liquidating your 401(k) plan, you have 60 days to roll it over to another qualified retirement plan or IRA. For more information, see Starting, Operating or Closing a Business.

What if I withdraw money from my IRA?
Generally, early withdrawal from an Individual Retirement Account (IRA) prior to age 59½ is subject to being included in gross income plus a 10 percent additional tax penalty. There are exceptions to the 10 percent penalty, such as using IRA funds to pay your medical insurance premium after a job loss. For more information, see Publication 590, Individual Retirement Accounts.

What if my 401(k) drops in value?
Generally, you can not claim a capital gains loss on your retirement accounts that already are receiving favorable tax treatment. The only time you would have a loss is when you receive a distribution that had previously been taxed. For more information, see Publication 575, Pension and Annuity Income.

If you believe you may have trouble paying your tax bill contact the IRS immediately. There are steps you can take to help ease the burden. You also should file a tax return even if you are unable to pay so you can avoid additional penalties.

source: irs.gov

Tax season usually heats up once that Groundhog Day is here. That’s usually the time you start getting your 2008 income tax information your income sources. 

But there is still two months yet before the deadline but time does fly. Before you know it you’re scrambling to get your federal income tax return done.

Filing one’s taxes electronically seemed like a novelty 10 years ago but accounts for almost six out of 10 returns today.

For the 2007 tax year that taxpayers filed a year ago, the Internal Revenue Service received almost 90 million by way of electronic filing out of a total 155.5 million returns.

And almost 27 million returns were filed from home computers, an increase of 19 percent from the previous year’s total of 22.6 million.

The options for free e-filing are increasing as well, said IRS spokeswoman Lea Crusberg.

For the 2008 tax year, which taxpayers will file by this year’s April 15 deadline, people with adjusted gross income of $54,000 or less - about 70 percent of all taxpayers - are eligible for free filing through the IRS in a partnership with some software manufacturers.

Last year, almost 4.8 million returns were sent through free-file, an increase of 24 percent compared with the previous year’s 3.9 million free-filed returns.

Federal Income Tax refunds are available in as few as 10 days from filing if the taxpayer provides the IRS with direct-deposit information.

Another route taxpayers might choose is through a paid tax preparer who also provides refund anticipation loans. That means the preparer will provide you with most of what your expected refund is for a fee.

The IRS said another benefit of its e-filing system is taxpayers can file now and if they owe money, pay later - up to the deadline of April 15.

“The IRS does not charge taxpayers to e-file their completed returns, but some tax preparers and software manufacturers may charge a fee. However, this year a number of large software companies are waiving this additional fee,” the IRS said.

E-filed tax returns are encrypted and taxpayers will receive an acknowledgement within 48 hours that the IRS has accepted the return.

The IRS also said that e-filed returns have an error rate of 1 percent compared with 20 percent for paper-filed returns.

So take advantage of free-filing federal income tax if you qualify. But if you don’t, take advantage of the online tax prep companies - in most cases, they are cheaper than going to an accountant.
source: beaumontenterprises.com