By Pamela Yip
RISMEDIA, November 17, 2009—(MCT)—Year-end tax planning this year will be different from years past, largely because of the recession. For many taxpayers, the year has meant a job loss, a job with less income or perhaps a home foreclosure.
There also have been government stimulus programs that have added to taxpayers’ take-home pay or given some homebuyers a tax credit. All these factors need to be taken into account when planning your taxes.
“Things are different this year for a lot of people in situations they’ve never been into before because of the economic times,” said Jimmy Averitt, tax partner at accounting firm BDO Seidman LLP in Dallas. “Those need to be assessed before the end of the year and compared with what occurred in prior years to get a handle on what their tax situation is,” he said. “You need to be doing that right now.”
Here are the possible tax implications of scenarios created by the ailing economy:
Generally, if you owe a debt to someone and they cancel or forgive that debt, the canceled amount may be taxable. However, the government offers a tax break to help homeowners who lost their home to foreclosure. Under the law, a taxpayer whose principal residence was foreclosed on does not have to claim the amount of debt canceled as income.
Debt reduced through a loan modification also is exempt. A loan modification makes mortgage payments more affordable by reducing the interest rate or lengthening the term of a mortgage. Up to $2 million of forgiven debt is eligible for this exclusion; the limit is $1 million for married couples filing separate tax returns. The provision applies to debt forgiven in 2007 through 2012.
If you’ve been laid off, your taxable income could “well be significantly lower when you start taking into account exclusions and dependency deductions,” Averitt said. That could leave you in a situation where your tax deductions exceed your income. If your deductions exceed your income and you need money, you could tap your retirement plan if you’re over age 59 1/2, Averitt said.
In those cases, the tax paid on the withdrawals will be largely offset by your deductions. If you’re younger than 59 1/2 and make withdrawals from your retirement plan, you’d have to pay a 10% penalty on top of the tax owed. That’s why James A. Smith, a certified public accountant in Dallas, says tap your retirement funds only as a last resort. “I also don’t advocate starving to death,” said Smith, managing director at Smith, Jackson, Boyer & Bovard, PLLC.
Conventional wisdom says to defer income and accelerate deductions to reduce your federal income tax. But Averitt said that for many people who have seen their family incomes slashed, this may be the year to go against conventional wisdom. That could mean deferring some deductions, such as local property taxes, until next year, when your income could be greater.
If you’ve been collecting unemployment, know that for 2009, the first $2,400 of unemployment compensation is excluded from tax. All unemployment compensation beyond the first $2,400 is taxable.
If you’re hunting for a job, keep track of the miles you drive, fees you pay for parking or tolls, employment agency fees, resume preparation fees, long-distance calls and other costs associated with your search. You may be able to claim these expenses as a miscellaneous deduction on your tax return.
The larger paycheck you received tied to the Obama stimulus plan could end up taking a bite out of your federal income tax refund, or even leave you owing taxes, observers says. The stimulus plan lowered federal income tax withholding rates, which results in more take-home pay and less money going toward taxes. The downside is some taxpayers may end up with not enough taxes being withheld to cover what they owe in 2009. As a result, some taxpayers may need to increase their withholding amount by reducing the number of allowances claimed on their W-4 form. However, with so little time left this year, the impact of making such a change may be muted.
Single taxpayers working at more than one job and married couples filing jointly where both spouses work, are the most likely groups of taxpayers to be caught short, tax experts said.
Taxpayers who have concerns about whether their withholding amounts need to be adjusted can use the withholding calculator at the Internal Revenue Service’s website to determine their correct level of withholding.
Congress has expanded and extended until April 30 a popular credit for first-time homebuyers. The $8,000 tax credit would have expired Nov. 30. “You can claim the credit on your 2009 tax return as long as you have a binding contract by the end of April and you close by the end of June,” said Neil Allen, spokesman for CCH, which provides tax and accounting software and services for tax professionals. If you file your return before you close on the purchase, you can file an amended return to claim the credit. The program was expanded to include up to a $6,500 tax credit for existing homeowners wanting to move up to a new home, as long as they have lived in their current residence for five consecutive years out of the last eight.
If you buy a new vehicle by Dec. 31, you can deduct state and local sales taxes paid on up to $49,500 of the purchase price, whether you itemize or not. The tax break starts to phase out if your modified adjusted gross income is $125,000 or more for single taxpayers and $250,000 or more for joint filers.
(c) 2009, The Dallas Morning News.
Distributed by McClatchy-Tribune Information Services.
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