Our leaders in Washington are working hard on a tax relief compromise that will extend the Bush-era tax cut packages enacted in 2001 and 2003.

A summary of the Obama-GOP tax deal, released by the Senate, is now pending on the Senate floor. The tax cut compromise summary, obtained from the Senate Democrats website, calls for temporary tax relief in the following areas:

• Temporary Extension of Tax Relief
• Temporary Individual Alternative Minimum Tax (AMT) relief
• Temporary Estate Tax Relief
• Temporary Extension of Investment Incentives
• Temporary Extension of Unemployment Insurance
• Temporary Payroll Tax Holiday
• Temporary Extension of Certain Expiring Provisions

Here is the summary of the Obama-GOP tax cuts compromise:

Tax Cuts Compromise Package Summary
December 9, 2010

I. Temporary Extension of Tax Relief

Two major bills enacting tax cuts for individuals expire at the end of 2010: the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA); and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). The following package extends these provisions from EGTRRA and JGTRRA for an additional two years, through 2012, and will provide important tax relief to American taxpayers. The following package also extends a number of provisions enacted as part of EGTRRA that were modified in the American Recovery and Reinvestment Act.

More on The Obama–GOP Tax Relief Compromise

Before you know it, federal income tax season will be here. If you were one of the millions of unfortunate Americans who lost their job in 2009, be aware it may have created new tax issues.

The Federal Stimulus Act has extended the tax benefit for those who received unemployment compensation in 2009. The first $2,400 of 2009 Unemployment Compensation is TAX-FREE. However, the unemployment benefits above the $2,400 limit will still count as taxable income.

Otther income tax issues created by unemployment have to do with severance and other payments. Severage payments from your former employer are taxable. In addition, any payments you received for accumulated vacation or sick time is also taxable. Always ensure that enough taxes are withheld from these payments to avoid a big tax bill.

Generally, withdrawals from pension plans are taxable unless they are transferred to a qualified plan (like an IRA). If you happen be under 59 1/2, an additional tax may apply to the taxable portion on your federal income tax.

If you sell stocks, bonds and investment property are not immediately taxable. However the sale of assets should be reported. If you have a gain on a sale, it may generate an income tax liability. You should review your overall tax situation and make sure you pay the required taxes to avoid any estimated tax penalty. Be aware that it may effect your federal income tax and state income tax (if applicable).

There are some deductions you can take when filing your federal income tax forms. You can deduct employment and outplacement agency fees, resume preparation, and travel expenses for job search and interviews.

If you lost your job, be advised that moving costs incurred because of a job change may be deductible. You must meet certain criteria relating to distance moved and timing of the move.

If you decide to start your own business after becoming unemployed, be aware that the IRS provides information and classes.

If you become eligible for Public Assistance or Food Stamps it is not taxable.

Your former employer must provide your W-2 by January 1, 2010, even if the business filed bankruptcy. If you haven’t received your W2 by the required time, contact your former employer. If that fails, the IRS can assist you in filing a substitute W-2.

If you lost your job in 2009, we suggest you contact IRS (www.irs.gov), your accountant or a tax attorney to maximize your tax deductions and reduce your tax liabilities.

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