Times are tough.
Here are the obvious economic signs as of June 1, 2009:
1. Unemployment is almost at 10% and is expected job losses are to continue at least through the end of 2009
2. Property values are dropping in most sectors of the United States
3. The Stock Market is almost 5000 points from its all time high
4. Businesses are failing as the economy weakens
5. The price of gas is approaching $2.50 a gallon nationwide again after a relief period that saw prices under $2 for some time (I still beleive that this is the most significant economic indicator for the past forty years and beyond until we rid ourselves of dependency on a foreign cartel- but that is another story)
6. Savings for Americans is dropping in order to pay for their rough times
Americans have sometimes coped with these tough times with certain transactions that, at the end of the year, translate into a significant tax bill that they are not able to pay. Here are some common transctions that are resulting in tax debt:
1. Liquidating 401(k)retirement accounts and Individual Retirement Accounts prematurely- these transctions, if classified as premature distributions, result in significant tax bills due to putting the recipient into a much higher than normal tax bracket (the highest bracket is 38%) if their distribution is significant PLUS an additional 10% penalty on early withdrawal of the pension/IRA funds. This rate can be as much as 48%. Becuase the "normal" withholding rule is only 20% of the distribution, this distribution can leave the recipient with a large tax bill at the end of the year.
2. Cancellation of Debt Income due to not paying credit cards or foreclosure on your home/other property- when credit card and mortgage/debt holders stop paying their debts, the lender may "write off" the debt or foreclose on the property. This transaction will lead to cancellation of debt income. Whether this income is taxable or not is based on a complex set of rules. If the income is taxable, it can have a resulting tax bill that significant. In fact, the IRS is expected to have almost 2 million debt cancellation income transctions reported to them in 2008. There is no federal income tax withheld on these transctions and thus, a potential tax bill if the income is fully or even partially taxable.
3. Changes made to withholding or not making required estimated tax payments- many Americans are changing their federal income tax withheld from their paychecks (this is done by changing the exemptions and/or filing status for withholding on a Form W-4with the employer). Furthermore, business owners and individuals who have significant investment income, are foregoing paying their quarterly estimated tax payments. Thus, at the end of the year, there is a signifcant tax bill due if their business income or investments have produced gains.
4. Extending unemployment income- normally, most people do not realize that unemployment income is taxable. In fact, there are many new filers for unemployment that they may beleive that the income will not be significant or even taxable. To make matters worse, most people who draw unemployment have no federal income tax withheld. An extended period of unemployment may have taxes due from the sources of income that do not have withholding, like unemployment, which results in a tax bill.
5. Businesses not remitting their payroll taxes to the IRS- businesses who are also "employers" are required to withhold FICA and federal withholding from their employees and remit these funds over to the Treasury. However, in tough times, some of these businesses withhold the funds, but do not pay them to the Treasury. Not paying withheld employment taxes to the IRS has serious consequences. The IRS takes this non-payment of taxes as the highest collection priority as the Treasury is paying refunds to taxpayer/employees despite not having the funds that the employer has not sent the IRS. If you are in this position, you have serious IRS problems.
Jun 7, 2009
Times are tough.