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Tax tips for tough economic times
NEW YORK (2/18/09)--Don’t be in a hurry to file your taxes this year or you may miss out on much-needed tax breaks. Check whether you qualify for deductions or credits, particularly if you lost your home to foreclosure, incurred job-hunting costs, or tapped your retirement accounts early (The New York Times Feb 10). Tax year 2008 was anything but normal, and the tough economy has tax filers asking tough questions. In response, the Internal Revenue Service (IRS) has ramped up its website with a special section to address common questions. The answers could mean a significant boost to your refund. Check how these situations affect your tax return before you file:
* Unemployment benefits. Although unemployment benefits were extended last year, those benefits are treated as taxable income. However, in most states you can choose whether or not to withhold taxes from unemployment benefits. If you have other sources of income--such as a spouse’s wages, you may benefit from withholding unemployment taxes. But, if unemployment benefits are your only source of income, withholding is not necessary because you will owe very little when you file your taxes (USA Today Feb. 10) * Retirement withdrawals. If you tapped your individual retirement account (IRA) or 401(k) and didn’t repay it within 60 days, you owe income taxes, plus a 10% penalty if you’re younger than age 59 ½. Ask about penalty waivers if you used the money for certain expenses, such as medical insurance payments, after you lost your job. You may qualify for similar penalty waivers for a 401(k) hardship withdrawal, unless you’re younger than age 59 ½. Other exceptions: You’re eligible for penalty-free withdrawals as long as you left your job the year you turned 55 or later. And you can tap your Roth IRA accounts penalty-free as long as you withdraw your own contributions but not investment earnings. * Discharged debt. If you had debt forgiven on your mortgage, you will not owe taxes on that amount--up to $2 million, or $1 million for married people filing separately. This applies only to debt used to purchase, build, or improve your home. * Earned income tax credit. More people qualify for the Earned Income Tax Credit: a married couple with two children and adjusted gross income less than $41,646 in 2008 may be eligible for a tax credit of $4,824. Even if you do not owe any taxes, you can receive the credit in the form of a check—but you must file to claim the credit. * Child and Saver’s tax credits. More taxpayers are expected to qualify for the child tax credit, the additional child tax credit, and the Saver’s Credit. Married couples filing jointly must have adjusted gross income of $53,000 or less. * Rebate checks. If you earned too much last year to qualify for the stimulus check, but your income has dropped (or you had a baby), you still may have a chance to claim it based on your 2008 income. Single taxpayers with incomes of less than $75,000 qualify for a $600 check. Those with incomes up to $87,000 will get a reduced amount. Married taxpayers filing jointly with income up to $150,000 qualify for the $1,200 rebate. Use line 70 on the 1040 tax return to claim the rebate. * Medical expenses. Itemized medical expenses exceeding 7.5% of your adjusted gross income are deductible. This includes co-payments, deductibles, premiums, health insurance costs, and other reimbursed medical expenses. * Miscellaneous deductions. To claim these deductions--which include tax preparation costs, safe deposit box fees, work uniforms, and job search expenses--all combined miscellaneous expenses must exceed 2% of your adjusted gross income. If you’re job hunting, deductible costs include résumé paper and printing, travel expenses, long-distance calls and faxes, postage, meals, and lodging expenses. If you’re forced to relocate at least 50 miles for a new job, expenses qualify. To claim the deductions, you must be searching for a job in the same business or trade as the one in which you were previously employed.
If you can’t afford to pay your taxes, file anyway--on time--and pay as much as you can afford to avoid penalties and interest. Ask for an extension, payment plan, or some other form of relief. The IRS website at irs.gov (search for “what if”) offers more answers to your 2008 tax-related questions. For more information, read “Don’t Miss Out on Tax Breaks” in Home & Family Finance Resource Center.
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