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Facing the Filing Deadline in a Tough Economy.

How to stay calm when your economic situation gives you tax-day jitters

CHICAGO -- Many Americans in tough financial situations are even more skittish than usual about filing their taxes this year.

"Tax day can be more painful than usual in a down economy," said Grant Thornton Tax partner Mel Schwarz. "Many people have been forced to make tough economic decisions, and now they're faced with unexpected tax consequences."

A difficult economic climate can leave taxpayers with tax issues arising from problems they didn't anticipate, like foreclosures, short sales, early withdrawals from retirement accounts, missed estimated tax payments or unemployment benefits. The National Tax Office of Grant Thornton LLP wants to offer a few helpful hints for taxpayers facing unfamiliar tax situations.

1. From a tax standpoint, don't fear a foreclosure or short sale. Usually, mortgage debt that is "forgiven" in a foreclosure, short sale or mortgage restructuring must be included with income, leaving taxpayers with an unwelcome tax bill. But under relief legislation passed in 2007, most personal mortgage debt forgiveness in 2007 through 2012 will be tax-free. Up to $2 million in forgiven mortgage debt from your principal residence can be excluded from your income by filing Form 982 with your income tax return. However, this does not apply to most home equity loans, unless used for home improvements.

2. Remember to include unemployment benefits. Don't forget to include your unemployment benefits in your income. Congress recently passed stimulus legislation with a much-advertised tax break for the first $2,400 of unemployment benefits, but that provision doesn't kick in until the 2009 tax year. Unemployment benefits in 2008 are still subject to tax.

3. Know the retirement account rules. It's likely that more workers than usual have been forced to withdraw money from their tax-preferred retirement accounts like 401(k)s and IRAs in order to make ends meet. You're typically going to be required to pay normal income tax on these withdrawals, plus a 10 percent penalty unless you're above the retirement age. Some plans allow hardship withdrawals for immediate and heavy financial needs, but check the rules closely. You'll only qualify for a hardship waiver for a very specific group of expenses.

4. Missing tax payments. Some self-employed taxpayers may have had more trouble than usual making their quarterly tax payments. If you haven't paid enough, don't compound the problem by ignoring it. Get current as quickly as you can to avoid excessive penalties and interest.

5. Don't bury your head in the sand. It doesn't make sense to file late, even if you're concerned about not being able to pay. You can also file for an automatic extension with Form 4868. It's painless and will spare you the failure-to-file penalties. Moreover, if you've paid at least 90 percent of your 2008 liability through withholding, estimated payments and any payment made with your extension, you won't be subject to the failure-to-pay penalty. Even if you're going to be short because of an early distribution from a retirement account or missed tax payment, file and contact the IRS about getting on a payment plan. The IRS has said that it's willing to work with taxpayers.

Tax Professional Standards Statement

About Grant Thornton LLP

The people in the independent firms of Grant Thornton International Ltd provide personalized attention and the highest quality service to public and private clients in more than 100 countries. Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd, one of the six global audit, tax and advisory organizations. Grant Thornton International Ltd and its member firms are not a worldwide partnership, as each member firm is a separate and distinct legal entity.

In the U.S., visit Grant Thornton LLP at www.GrantThornton.com.
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Publication:Business Wire
Date:Apr 15, 2009
Words:624
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