IRS offers tips for upcoming tax season
The IRS Monday kicked off its annual tax preparation season by announcing a program to more closely scrutinize paid tax preparers and offering consumers tips on legitimate deductions for their 2009 tax returns.
The scrutiny will when the IRS sends about letters to about 10,000 paid tax preparers who have had the largest number of errors. Then IRS officers, as well as some undercover agents posing as regular taxpayers, who will visit preparers to see what type of information is being provided to consumers.
The most frequent errors involve the earned income tax credit and the first-time homebuyer stimulus credit, said IRS Commissioner Doug Shulman.
"We want to remind them to be more vigilant," he said. "After all, the taxpayer is ultimately responsible."
That's why taxpayers need to be better informed on what they can and cannot deduct. With such a tough economy, and so many people unemployed and facing financial crisis, the IRS has offered this information, as well as more at IRS.gov.
Q. What if I lose my job? A. 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 tax payments to avoid a big bill at tax time. Public assistance and food stamps are not taxable.Q. What if I receive unemployment compensation?A. Unemployment compensation must be included in your income. It is taxable. If you received unemployment compensation, you should receive Form 1099-G showing the amount you were paid and any federal income tax you elected to have withheld. Note: The American Recovery and Reinvestment Act temporarily will change the taxation of unemployment benefits for the 2009 tax year only. Under the new economic stimulus law, the first $2,400 of unemployment benefits received in 2009 will not be subject to federal taxes. The exemption will be reflected on those tax returns filed in 2010.Q. What if my income declines? A. There are many tax credits that are subject to income limitations. If you had a reduction in income this year, you may be eligible for some credits or deductions. For example, the Earned Income Tax Credit is available for working families and individuals. Eligibility is determined by income and family size. You must file an income tax return in order to claim EITC.Q. What if my 401(k) drops in value? A. Generally, you cannot claim a capital gains loss on your retirement accounts that already are receiving favorable tax treatment. The only time you would have a loss is when you receive a distribution that had previously been taxed.Q. What if I am searching for a job? A. You may be able to deduct certain expenses you incur while looking for a new job, even if you do not get a new job. 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.Q. What if my employer goes out of business or in bankruptcy? A. Your employer must provide you with a Form W-2 showing your wages and withholdings for the year by Jan. 31 of the following year. For example, if you were employed during 2009, your employer should provide you with a W-2 for 2009 by Jan. 31, 2010. You should keep up-to-date records or pay stubs until you receive your Form W-2. If your employer or its representatives fails to provide you with a Form W-2, contact the IRS and we can help by providing you with a substitute Form W-2. If your employer is liquidating your 401(k) plan, you have 60 days to roll it over to another qualified retirement plan or IRA.Q. What if I lose my home through foreclosure? A. 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 tax return for previous tax years.Q. What if I sell my home for a loss? A. Losses from the sale of personal-use property, such as your home or car, are not deductible nor eligible for the capital gains loss of up to $3,000 annually.Q. What if I file for bankruptcy protection? A. Debts discharged through bankruptcy are not considered taxable income. If you are an individual debtor who files for bankruptcy under chapter 7 or 11 of the Bankruptcy Code, a separate "estate" is created consisting of property that belonged to you before the filing date. This bankruptcy estate is a new taxable entity, completely separate from you as an individual taxpayer. Please note, however, that some tax debts are not dischargeable in a bankruptcy action.