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As the unemployment rate remains stubbornly high, a weak job market means more individuals relying upon money from sources other than wages. The tax impact of these actions is therefore a major consideration for anyone providing tax preparation services.
When earned income declines, bills are still due. The tax consequences vary among different sources of funds. When one job is gone, the search for another begins. Keeping track of some costs during this process results in valuable tax deductions. Registered Tax Return Preparer work requires careful consideration of distinctive details for the returns of unemployed individuals.
An RTRP can even advise unemployed people about helpful tax measures to follow. For example, an examination of severance checks - including payment for accrued vacation and sick time - reveals if sufficient withholding is reflected. Withheld income tax might not cover the amount of liability for the year. In that case, an estimated tax payment could become necessary to avoid a tax underpayment penalty.
Also, tax-exempt contribution of wages to pay annual childcare expenses demands scrutiny. Any unused allocation becomes taxable if it is not spent on childcare. This can occur when the unemployed use their new free time to care for their children.
In fact, an unemployment situation is an ideal opportunity to deploy information learned in a tax planning course. The results usually find that withholding on wages assumed full-year employment. Consequently, the job loss causes excess tax withholding. However, there are other new income sources likely to arise upon unemployment.
A good tax preparation checklist covers details applicable to the unemployed. First, unemployment compensation is taxable income. If necessary, a taxpayer may implement federal tax withholding on these payments. Most other forms of public assistance are not taxable. These categories include food stamps as well as payments under the WIC and TANF federal programs. Gifts of support from family are also not subject to income tax.
RTRP training also addresses the tax impact of withdrawals from retirement plans. These distributions before age 59� incur both regular income tax plus a 10 percent penalty. However, the penalty is avoided on IRA withdrawals to pay health insurance premiums. In addition, returns of current-year IRA contributions transpire without penalty.
With lower income during unemployment, non-working taxpayers may enjoy more tax deductions. For example, deducting medical expenses and the cost of looking for a job requires exceeding an income threshold. That is easier to accomplish with reduced adjusted gross income. In addition, lower income may qualify the unemployed - particularly those with children - for the Earned Income Tax Credit.
When a new job requires moving, the relocation costs are usually deductible. The requirement is that the new job is located at least 50 miles farther from the previous home than the old job. In that case, tax preparation should capture the expenses for transporting people, possessions, and pets. Taxpayers don't even have to itemize deductions in order to enjoy this tax benefit.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
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