Tax Moves for Tough Times

If you liquidate all of the Roth IRAs you own, or all of the 529 accounts you hold for the benefit of a single child, and what you realize is less than you put in, you can claim a loss, but not on Schedule D, where you report capital losses. Instead, the loss is claimed on Schedule A as a miscellaneous itemized deduction. Such deductions can only be taken to the extent they exceed 2 percent of your adjusted gross income and aren't allowed at all in the alternative minimum tax calculation. Still, if you put a big slug of money into a 529 before the market tanked, the deduction might be useful. Plus, you can put money back into a 529 later--just wait more than 60 days so the IRS won't treat this as a rollover, says Jim Van Grevenhof, a senior tax analyst at Thomson Reuters.

Losses on the sale of your primary residence? Not deductible. Congress has given some relief, however, to those who renegotiate their mortgages or lose their homes to foreclosure. In such cases, the lender is likely to forgive some debt, which traditionally counts as income to a taxpayer--unless, that is, he's in bankruptcy or insolvent. If you've received a 1099-C from a lender reporting cancellation of debt income, check out Form 982; you may be able to take advantage of a provision passed in 2007 excluding certain forgiven mortgage debt from income.

Another tricky issue: getting money out of pretax retirement accounts without incurring the normal 10 percent early withdrawal penalty, for reclaiming money before age 59 1/2. The penalty is on top of any regular tax you might owe.

If you're strapped for cash, or fear you will be soon, you can still take back any contributions you made to an IRA for 2008, so long as you do this before filing your return and report any earnings on that contribution (yeah, sure) as income. In addition, you can withdraw any year's contributions to a Roth IRA without penalty, since they were all made after tax.

If you lose your job, a few special rules may help: If you're 55, you can access money in a pension plan such as a 401(k) without the 10 percent penalty. (You will still owe regular income taxes on the payouts.) No similar exemption exists for IRAs, but there are narrower ones. You can take money from an IRA, without penalty, to pay bills for higher education, for certain medical expenses and if you've been collecting unemployment for 12 weeks, to pay health insurance premiums. For details, see IRS publication 590, "Individual Retirement Arrangements (IRAs)".

Meanwhile, if you can't pay all you owe come April 15, file your return or a request for an extension anyway. If you don't file, there's a 5 percent per month penalty on the balance due, whereas if you file (or request an extension) and can't pay, the penalty is just 0.5 percent per month. (Both penalties top out at 25 percent of the amount due and are in addition to interest.)

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