Debt Relief At Tax Time
March 18, 2009
More than two hundred years ago, Benjamin Franklin said: “Certainty? In this world nothing is certain but death and taxes.” As April 15 approaches, you may be looking for ways to pay taxes you may owe. You may also be looking for debt relief. Depending upon your circumstances, you might actually find some.
Taxes on income earned in the 2008 calendar year are due on April 15. While the filing date is immovable, the IRS is not. If you know that you will not be able to pay taxes you owe, contact the IRS. You’ll still need to file your paperwork by the deadline, but the IRS will work out payment plans that fit your budget. The agency cannot waive interest that accrues on unpaid taxes, but depending upon the circumstances, it may be able to waive penalties, provide a temporary extension on the due date for you, create an installment plan or work out a settlement amount. Each taxpayer’s circumstances will be different, so call the IRS at (800) 829-1040 for more information.
When you file your taxes, keep in mind that the IRS (for the most part) doesn’t make the rules. Congress is responsible for writing the tax code. It’s the IRS’ job to enforce the rules that Congress has made. In the past year, Congress has passed some relief for taxpayers that will show up on this year’s filings.
Notably, if you have lost a home to foreclosure, or completed a short sale to avoid foreclosure, the mortgage holder may have forgiven a portion of the mortgage debt you owed on the home. Under normal circumstances, this debt would be considered income. Thanks to the Mortgage Forgiveness Debt Relief Act of 2007, you will not have to pay income taxes on the forgiven portion of the debt. This provision sunsets at the end of 2009 – something to keep in mind if you’re currently considering a short sale on your primary residence. Note that the exemption does not apply to second homes, vacation homes or rental properties you might own.
If you sold your home in 2008 at a loss, you’re likely out of luck. You cannot claim a capital loss on personal property like a home or a vehicle that you sold for less than its paper value. Other capital losses may be eligible for a deduction of as much as $3,000. This limit applies to all capital losses over the year.
You’re also not going to get much help from the tax code when it comes to losses suffered by your retirement accounts. Generally, non-taxed retirement contributions already receive a favorable tax treatment from the IRS. A loss of these funds is generally not deductible, with a few very narrow exceptions.
If you have suffered an income loss in 2008, you may be eligible for the Earned Income Credit. This credit is reserved for lower-income taxpayers and is based on income and family size.
