Free tax preparation available to help families navigate tax deductions

By RENEE JEAN
Daily Journal Assistant Managing Editor

Published: Friday, January 30, 2009
Updated: Friday, January 30, 2009 9:43 AM CST

Even if you’re among the laid off, you will probably still need to file a tax return for 2008, and you may find you owe a surprisingly large tax bill come April.

Many people decide not to have taxes withheld from their unemployment benefits — figuring they won’t owe much — and opt to pay what they do owe in a lump sum when taxes come due in April.

But that tax bill can get an unexpected boost from such things as severance packages, which are also considered taxable income by Uncle Sam, and emergency distributions from a 401K or an IRA. (Such distributions may also be subject to early withdrawal penalties as well as income taxes, if they were not made for a qualified exception.)

Workers must also pay self-employment taxes on any odd jobs or freelance work greater than $400 in addition to the usual income tax, a double whammy tax payers often fail to take into account.

Those factors can leave an already struggling taxpayer with a surprisingly large tax bill come April.

There are, however, a few things that can help lower any tax burden you face.

First, keep track of any expenses associated with doing any odd jobs or freelance work. Mileage, depreciation on tools, home office expenses, advertising, long distance calls — those are just some of the expenses that could help you offset any income from the work.

Out-of-pocket medical expenses are deductible as long as they exceed 7.5 percent of adjusted gross income. That includes insurance premiums that an unemployed person may be continuing under COBRA. Premiums can easily exceed $700 a month for a family of four. Mileage expenses to the doctor or hospital and other out-of-pocket expenses also qualify, so gather up the receipts and records for those as well.

Some job search expenses are also deductible, as long as they are for a job in your current trade or business and the total expense exceeds 2 percent of your adjusted gross income.

Legal fees to protect your employment status, career counseling, placement agency fees, resume typing and printing, advertising, long-distance phone calls, postal and travel expenses may all qualify for deduction. The line is drawn at personal expenses, however, such as a new business suit or briefcase. Such things do not qualify for a deduction.

Some educational expenses or classes can be written off, if the unemployment is temporary and the classes were meant to enhance current job skills.

And moving fees to relocate to a new location that would be at least 50 miles further away may qualify. They are not subject to the “same trade or business” limitation.

If you lost a home, you can generally exclude income from the discharge of debt on a principal residence or mortgage restructuring under the Mortgage Forgiveness Debt Relief Act of 2007. That exception only applies to your primary residence. It does not extend to second homes or vacation homes.

And don’t forget to check your eligibility for the Earned Income Credit. One in five families who qualify for that tax credit miss it, according to IRS officials. It can be up to $4,824 for a family making less than $41,646 with two qualifying children.

Since the EIC is a tax credit instead of a deduction, you will get the money even if you do not owe any taxes at all. That can really help lower an unexpectedly high tax bill.

If it all sounds a little too complicated to wade through by yourself, free tax preparation help is available for those making $38,000 or less with the Volunteer Income Tax Assistance program.

VITA volunteers are all trained by the IRS to prepare basic returns and can help ensure you claim all the deductions you are due. The program is sponsored by the East Missouri Action Agency in eight counties including St. Francois. The program includes the option to file electronically, which can help you get your refund faster than mailing it via the Post Office.

Call 431-0103 or toll free at 1-800-392-8663 to make an appointment. The program will be starting up after Jan. 21.

Another option for free tax preparation is the Free File program at www.irs.gov, which begins Jan. 16. Make sure to use the extension .gov rather than .com or .org. Web sites ending with those extensions are not affiliated with the IRS.

The Free File program offers tax preparation software that walks you through your taxes and allows you to file electronically.

 

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