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What to Do in Case of an Economic Downturn #1: Employment Issues

August 23rd

The IRS, understanding the possible hardship that many taxpayers might be facing, has recently issued a comprehensive list of “what if” scenarios. This list outlines a variety of possible situations people might find themselves in during an economic downturn and the potential tax impact of those situations.

What Are Some Causes Of Tax Debt

One of the chief concerns felt by Americans at present is worry over job security. Here are a number of job-related situations you might find yourself in and the possible implications for your tax bill:

1. Job Loss. Unfortunately, many Americans are facing the loss of their jobs during the present economic crisis. If you become unemployed, it could create new tax issues. Be aware, both severance pay and unemployment compensation are taxable. To avoid a large bill at tax time, ensure that enough taxes are withheld from these payments or make estimated tax payments over time. On the other hand, public assistance and food stamps are not taxable. Many people cannot afford to pay their taxes and simply ignore the problem; however, unpaid taxes can create further problems down the road.

2. Declining Income. If your income is reduced, it is important to be aware of how this might change your tax bill. There are many tax credits that are subject to income limitations. For example, the Earned Income Tax Credit, available to both working families and individuals, is decided based on income and family size. To claim this credit, you must file an income tax return.

3. Employer Goes Out of Business. In the case that your employer goes out of business, they must provide you with a Form W-2, showing your wages and withholdings for the year by January 31 of the following year. In addition, if your employer is liquidating your 401(k), you have a full 60 days to roll it over to another qualified retirement plan or IRA.

4. Early Withdrawal of Money from an IRA. In some cases, it might become necessary to draw on funds placed in an Individual Retirement Account (IRA). In these cases, any funds withdrawn early from an IRA (prior to age 59.5) are subject to inclusion in your gross taxable income as well as a 10 percent additional tax penalty. There are exceptions to this rule, such as using IRA funds to pay your medical insurance premiums following a job loss.

 

 
 
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