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Archive for Wednesday, September 23, 2009

Tax tips abound for victims of slump

September 23, 2009

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— If you’ve been pounded by the recession, I imagine the last thing you want to think about is your tax situation. But you don’t want to get clobbered come April.

The Internal Revenue Service has a helpful list of questions and answers for people in financial trouble. Go to irs.gov and type in the search field “The What Ifs of an Economic Downturn.”

For example, do you have to pay taxes if you lose your job and receive a lump-sum severance? Of course you do.

What if you are paid for accumulated sick leave and unused vacation time? Also taxable. However, if you receive public assistance and food stamps, those entitlements are not taxable.

Unemployment benefits vary, but the average is $305 a week. Normally, unemployment compensation is taxable. And some states also tax benefits, according to the Department of Labor. Yet thanks to the American Recovery and Reinvestment Act, the first $2,400 of unemployment benefits is exempted from federal taxation — but only for the 2009 tax year.

If you are married, the exclusion applies to each spouse, separately. So if both of you are receiving unemployment benefits, you each may exclude the first $2,400 of benefits you receive.

Unemployed workers can opt to have income tax withheld from their benefit payments. If you choose to have taxes taken out, you’ll have a flat 10 percent withheld. Use IRS form W-4V “Voluntary Withholding Request” to withhold money from your unemployment benefit.

Earlier this year, Rep. John M. McHugh, R-N.Y., introduced legislation that would suspend the taxation of unemployment compensation for two years. McHugh has since resigned his seat to become secretary of the Army, but it deserves a thorough debate.

If you lose your job, what expenses, if any, can be deducted? You may be able to claim certain expenses you rack up looking for a job, including résumé and outplacement agency fees.

If unemployed, you might qualify for the Earned Income Tax Credit, or EITC, meant for low- to moderate- income working individuals and families. It means you can get money back even if you owe no tax or the credit is more than the tax owed. Twenty-two states offer such a credit, according to the IRS. Go to irs.gov and search for “States and Local Governments with Earned Income Tax Credit” to see if your state offers this.

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