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

Do you think the IRS has a heart? Well, the Internal Revenue Service wants you to think so. Although the IRS has historically been cold-heartened and downright ruthless, it appears they recognize that many taxpayers are having difficult times financially. There can be a tax impact to events such as job loss, foreclosure, bankruptcy or tapping a retirement fund that may result in you not being able to pay your federal income tax. The IRS wants to help, sort-of, by providing this advice for those of you who can’t pay your taxes.

So what do you do if you can’t pay your federal taxes?

“The first thing to do is not panic. If you cannot pay the full amount of taxes you owe, 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 immediately to discuss your payment options at 1-800-829-1040. The agency may be able to provide some relief such as a short-term extension to pay, an installment agreement or an offer in compromise. In some cases, the agency may be able to waive penalties. However, the agency is unable to waive interest charges which accrue on unpaid tax bills” as is stated on the IRS website.

If you will owe a significant amount of federal taxes and can’t pay it, one of best things to do is consult with a tax attorney before you contact the IRS. The tax attorney will go over your situation, give the options available and make you feel more at ease. If you decide to hire the tax attorney, he can represent you in your case with the Internal Revenue Service

source: irs.gov