Many of life’s events such as losing a job, foreclosure of a home or even forgiveness of a debt impact the payment of taxes. The tax law offers hope in these situations. As an example, if a taxpayer’s income decreases, he or she may be eligible for certain tax credits, such as the Earned Income Tax Credit. In this blog, We will present a list of quick answers to life event situations that have a potential impact on an individual’s tax burden. For more information see our blogs: Part 1 – What If: Job Related Life Events and Struggling Taxpayers; and Part 2 – What If: Debt Related Life Events and Struggling Taxpayers.
What if I lose my job? What if I receive unemployment compensation?
Public assistance and food stamps are not taxable while severance pay, unemployment compensation, sick time, and payments for any accumulated vacation are taxable.
What if my income declines?
Many tax credits are subject to income limitations.
What if I am searching for a job?
Possible expenses that may be deducted include travel, resume and outplacement agency fees.
What if my employer goes out of business?
If your employer is liquidating your 401(k) plan, you have 60 days to roll it over to another qualified retirement plan or IRA.
What if I close my own business?
Employers are still are responsible for filing all required tax returns for a business by the due dates.
What if I withdraw money from my IRA?
Early withdrawal from an Individual Retirement Account prior to age 59½ is generally subject to being included in gross income, in addition to a 10 percent penalty.
What if my 401(k) drops in value?
If your retirement account is already receiving favorable tax treatment, you may generally not claim a capital gains loss.
What if I lose my home through foreclosure?
Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may generally exclude income from the discharge of debt on their principal residence or mortgage re-modification.
What if I sell my home for a loss?
Losses from the sale of personal–use property, such as a home or automobile, are not deductible.
What if my debt is forgiven?
The tax impact of debt forgiveness or cancellation depends on the individual facts of each case. One of several exceptions to the taxability of cancelled debt is bankruptcy.
What if I am insolvent?
Taxpayers are insolvent when their total liabilities exceed total assets. Forgiven debt may be excluded as income under the “insolvency” exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent.
What if I file for bankruptcy protection?
Debts discharged through bankruptcy are not considered taxable income. However, it can be difficult to discharge tax debt in a bankruptcy.
It is of the utmost importance when facing these tax-related issues and concerns to consider the assistance of an experienced tax attorney. If you live in the New York or the Tri-State area and are facing any of the questions or scenarios presented above, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation, call 212-490-0704.
