The Internal Revenue Service is offering taxpayers some guidance on the tax implications of economic hardship because of the deepening recession. Among the "What If" scenarios presented by the agency, and its response:
Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time also are taxable. You should ensure that enough taxes are withheld from these payments, or make estimated payments to avoid a big bill at tax time. Public assistance and food stamps are not taxable.
You may be able to deduct certain expenses you incur while looking for a new job, even if you do not get one. Expenses may include travel, resume and outplacement agency fees. Moving costs for a new job at least 50 miles away from your home may also be deductible.
Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers generally can exclude income from the discharge of debt on their principal residence or mortgage restructuring. This exception does not apply to second homes or vacation homes. In some cases, you may be able to file an amended return for previous tax years.
If you cannot pay the full amount you owe by the April deadline, file your return by the deadline and pay as much as you can to avoid penalties and interest. Also contact the IRS at 1-800-829-1040 to discuss payment options. The agency may be able to provide some relief, such as a short-term extension, installment agreement or offer in compromise. In some cases, the agency may be able to waive penalties. However, it will not waive interest charges that accrue on unpaid tax bills.
Source: The Internal Revenue Service