Filing taxes can be complicated and confusing, especially if you are suffering from financial hardships. From unemployment benefits to severance pay, there are many different situations that can impact your taxes. We break down the 'what ifs' of an economic downturn, according to the IRS.
If You Receive Unemployment
According to the IRS, unemployment compensation is taxable and must be included in your income. A 1099-G form should be sent to you displaying the amount you received and any taxes you had withheld.
If You're Insolvent
According to the IRS, a taxpayer is insolvent when his or her liabilities exceed total assets and the forgiven debt owed may be left out as income under the 'insolvency' exclusion. Usually, a taxpayer doesn’t need to account forgiven debt to the extent he or she is insolvent.
If Debt is Forgiven
Taxes impact of debt forgiveness varies depending on the situation. For instance: If you borrow money from a commercial lender, and it is cancelled or forgiven by the lender, you may need to include the cancelled amount in your income. Cancellation of debt is usually required to be reported by the lender to you and the IRS. However, there are some exceptions, such as bankruptcy, to the taxability of cancelled debt.
If Your Income Declines
According to the IRS, if you had an income reduction this year, you may qualify for some tax credits. Eligibility for certain deductions, such as the Earned Income Tax Credit for working families and individuals, is determined by income and family size.
If You File For Bankruptcy Protection
According to the IRS, debt released through bankruptcy is not considered taxable income. If you filed for bankruptcy under chapter 7 or 11, then the newly-created estate of property that belonged to you before the filing date is taxable and completely separate from you as an individual taxpayer.
If Your 401(k) Drops in Value
NEW: In most cases, you can’t claim a capital gains loss on retirement accounts that already get favorable tax treatment, according to the IRS.
If You Can't Pay Your Taxes
According to the IRS, to avoid penalties and interest, you should still file your return on time and pay as much as you can if you cannot pay the full amount of taxes you owe. Be sure to call the IRS to create a payment plan—it may be able to give you short-term pay extensions, come up with an installment agreement, or an offer in compromise.
If You Can't Resolve Your Tax Problem With the IRS
If you can't resolve your tax problem with the IRS through normal channels or think you are being treated unfairly, contact the Taxpayer Advocate Service (TAS). The TAS is an independent organization within the IRS that assists taxpayers experiencing economic harm and need help resolving tax problems. The IRS also suggests calling or writing your local taxpayer advocate.
Filing taxes can be confusing, especially if you suffered financial hardships this year.