Tax Measures for Tough Times

With unemployment figures hovering around 10% nationally, millions currently out of a job can breathe a sign of relief that unemployment benefits have been extended through 2011.  There may be more.  Liberty Tax urges those facing hardships to examine other tax measures that may be advantageous, and weigh the pros and cons of some available options.

“Unemployment compensation is considered taxable income, but reduced earned income for the year 2010 may mean that the taxpayer may be eligible for the Earned Income Tax Credit,” said Kesha Haley, Owner, of Liberty Tax Service. 

Other possible tax breaks include claiming the tax credit for child and dependent care expenses paid when looking for work, a tax credit for health coverage when a worker is laid off, a retirement plan withdrawals without penalty when paying for unreimbursed medical expenses, and a deduction for job-hunting expenses for those who itemize. Those who must pay for child and dependent care in order to go on job interviews may claim up to 35% of these expenses as a credit against their tax.  This is accomplished by filing Form 2441, Child and Dependent Care Expenses with the tax return.

Losing a job can mean losing health insurance. To help people maintain coverage for themselves and their families, the 65% subsidy for COBRA continuation premiums has been extended from 9 to 15 months for workers who have been involuntarily terminated between September 1, 2008 and May 31, 2010. This subsidy also applies to health care continuation coverage if required by states for small employers.  Special circumstances may apply for workers who experienced cutbacks in their hours. The subsidy would terminate upon offer of any new employer-sponsored health care coverage or Medicare eligibility.

For qualified former employees who were downsized due to trade considerations, the Health Coverage Tax Credit is a refundable credit that can cover 65% of health care costs for the former employees and their families when participating in health insurance plans.  Qualified persons are defined by Trade Adjustment Assistance (TAA) or Alternative Trade Adjustment Assistance (ATAA) requirements for former employees and retirees aged 55 and older whose pensions were taken over by the Pension Benefit Guaranty Corporation (PBGC).  To determine eligibility for monthly payments, a taxpayer can contact the HCTC. File Form 8885, Health Coverage Tax Credit, with the tax return to claim the credit which can give a refund even when no tax has been withheld.

Taxpayers with unreimbursed medical expenses in excess of 7.5% of their adjusted gross income can pay the excess amount with early withdrawals of funds from a 401(k) or IRA account without paying the 10% additional tax.  This is done by reporting the appropriate exception number on Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and entering the amount of the distribution that qualifies for the exception.

The tough project of looking for employment may provide a tax break for job seekers who can itemize.  Documenting the costs of a job search may deliver a tax break whether it results in a new position or not.  This applies for persons looking for a change within their current profession.  Job search expenses may be deductible when, totaled with employee expenses and other miscellaneous deductions, they exceed 2% of adjusted gross income.  These are reported on Schedule A Itemized Deductions which is filed with Form 1040. The IRS allows the following job-hunting expenses:

• Employment and out placement agency fees
• Costs of resume printing
• Costs of typing, printing and mailing resumes
• Legal fees related to doing and keeping your job
• Some travel expenses to and from job interviews

There may be other job expenses due to layoffs.  If a taxpayer incurs legal expenses to fight a non-compete clause, these expenses may be claimed as a job-related expense. 

Homeowners experiencing “short sales” and foreclosures will get an extended break for “debt-forgiveness” tax consequences.  Instead of treating cancellation of debt as taxable income on the foreclosure of a principle home, no taxes will be levied on discharges of indebtedness of up to $2 million dollars for married taxpayers filing jointly and of up to $1 million dollars for a married taxpayer filing a separate return through tax year 2012. 

About Liberty Tax Service

Liberty Tax Service is the fastest growing retail tax preparation company in the industry’s history.  Founded in 1997 by CEO John T. Hewitt, a pioneer in the tax industry, Liberty Tax Service has prepared over 8,000,000 individual income tax returns.  With 41years of tax industry experience, Hewitt stands as the most experienced CEO in the tax preparation business, having also founded Jackson Hewitt Tax Service

Liberty Tax Service (www.libertytax.com) provides computerized income tax preparation, electronic filing, refund loans, and online filing through eSmart Tax at www.esmarttax.com.  Each office offers customers audit assistance, a money back guarantee, and free tax return checking.