For recession victims, there’s some help available to cut your income tax bill
If you’ve been pounded by the recession, I imagine the last thing you want to think about is your tax situation. But you’d better be thinking about it, because you don’t want to get clobbered come April. The Internal Revenue Service has put together a very helpful list of questions and answers for people in financial trouble. You can see the full list of questions by going to www.irs.gov and type in the search field “The What Ifs of an Economic Downturn.’’
For example, what if you lose your job and receive a lump-sum severance? Do you have to pay taxes on that money? Of course you do. What if you are paid for accumulated sick leave and unused vacation time? Also taxable.
It’s important that you know this so you can set aside enough to pay these taxes next year. However, if you receive public assistance and food stamps, those entitlements are not taxable.
What about unemployment benefits? Unemployment benefits vary, depending on where you live, but the average is $305 a week. So you can imagine people don’t want to get taxed on that puny amount. Normally, unemployment compensation is taxable. And some states also tax benefits. Yet thanks to the American Recovery and Reinvestment Act, the first $2,400 of benefits is exempted from federal taxation - but only for the 2009 tax year.
Unemployed workers can opt to have income tax withheld from their benefit payments. If you think you may owe, it’s probably a good idea to do this to avoid coming up short next April.
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 resume and outplacement agency fees.
If you are unemployed, you might now qualify for the Earned Income Tax Credit, which is meant for low- to moderate- income working individuals and families. As a refundable credit, it means you can get money back even if you owe no tax or the credit is more than the tax owed.
EITC can reduce your taxes, and that can mean more needed funds. You also may be eligible for a similar credit on your state income tax return.
What if you’ve lost your home to foreclosure? Worried about a tax bill for any debt your lender may have forgiven? There’s a tax break for that, too.
Generally, if a lender wipes away a debt, that forgiven amount is considered taxable income. However, the housing crisis led to the passage of the Mortgage Forgiveness Debt Relief Act. Up to $2 million of forgiven debt is eligible for this exclusion on a principal residence. The forgiven debt won’t be taxable for tax years 2007 through 2012.
And I’m sorry, but if you had to sell your home for less than the mortgage amount, your loss is not deductible.
If you’ve been hit hard economically, take the time to find out what tax breaks are available to you. Every little bit will help.
Michelle Singletary is a columnist for The Washington Post. 
