December 11, 2012

If you experienced financial hardships in 2011 that may affect your taxes and now you need some tax relief, the IRS offers “The What Ifs of an Economic Downturn.” This handy guide reviews the tax impact of different scenarios such as job loss, home foreclosure and back taxes.

Some of the more common economic challenges outlined in the booklet include:

What if you lost your job? One of the most important things tax payers need to remember (but can often overlook) is that unemployment benefits, severance pay and final vacation pay are all taxable income. If you don’t have taxes withheld at the time you receive payment, you will have to pay the taxes when you file.

In addition, if you withdraw money from your IRA or 401(k) to cover expenses while you’re unemployed, you’ll have to pay taxes plus, if you are under the age of 59 ½ you’ll owe a 10% penalty. Under some special circumstances – such as medical bills – you may be able to offset the amount you owe.

Keep in mind there are public assistance programs – food stamps and welfare – that you may be eligible for that don’t count toward taxable income.

What if you lose your home through foreclosure? You can generally exclude income from the discharge of debt on your principal residence, mortgage restructuring and a mortgage debt forgiven as part of a foreclosure.

There are limits on the amount of debt that can be forgiven – up to $2M ($1M if married and filing separately) – and only for debt forgiven in 2007 through 2012.

What if you can’t pay your taxes? If you are unable to pay all your taxes, file your return by the deadline and pay what you can. This will help you to avoid incurring more debt through penalties and interest. Then contact the IRS to discuss options.

You may be able to get a short-term extension, an installment agreement or an offer in compromise. In some instances, they may even waive the penalties. They do not waive interest accrued.

Whatever your financial situation, you have tax relief options. One solution may debt settlement. It can help you combine all your outstanding unsecured debt into one monthly payment, generally at a portion of what you currently owe.