by Jay Majors - Mar 5, 2010
General Issues Related to Unemployment
First of all, the impact of your job loss and what areas may be taxable and may not be taxable for you. Some of you may have been out of a job for a very long time. Some of you, not so long ago. You may have had severance pay, vacation pay, things like that. Obviously most all of you know that that would be taxable income. You also know that unemployment itself is taxable. In 2009, the first $2,400 of your unemployment is not taxable. That goes away for 2010, so all you guys who are still drawing unemployment in 2010, you don't get that exclusion going forward. I know that's probably going to affect a few of us in the room.
Cobra is another issue that's related to unemployment, and some of you qualified for it, and some of you didn't. Your employer, larger companies for the most part, they will be picking up that 65%, and you having to pay 35%. Some of your Cobra issues may be running out. We don't know what's going to happen with that yet, and I'll be talking about that going down the line. A lot of the small companies didn't even offer some of that to their employees, or let them know about it. So, if you had a nice big severance, if you were laid off more recently, you might not even qualify to be able to utilize that break. That may be a question that you want to ask your employer if you're in that situation.
Some of you may have questions if you're maybe like me, you're family has helped you out with a few things here and there. Maybe they've given you some extra money to help you pay the bills. Generally that's not going to be taxable to you, or to them, until they reach a certain level of gifting to you, and then it would be taxable to them. And ever year that level goes up. It's about $13,000 this year. So, that won't be something that you'll have to worry about in case you were having questions that, "Oh, my mom gave me some money to pay my bills?"
If you had sold stocks and bonds this year (most of you probably had losses), you're not going to worry about paying tax on that. But, if you had some income gain, they're certainly going to be taxable. They're going to be figured into your taxable income. And a lot of people don't do that.
Another area of concern would be your IRA's and if you're taking money out of retirement plans, whatever type of retirement plan it is. Unfortunately, that's going to be taxable. If you're under that 59 1/2 age range, it's going to be taxable for you. If you did take something out, if you left behind some IRA's, I would strongly consider looking what you got, and contacting your employer and contacting the plan administrators there, and making sure that you're not going to lose some benefits, or either get everything rolled over into a plan that you can manage and you know where your money is at. But if you had to take money out of your retirement to pay your bills, which I hope people didn't, that's going to be taxable to you. There are some caveats in that area. A lot of you may have college age students, and things like that. If you can make a justification that you pulled that money out in order to pay those college expenses, then it may be non-taxable to you.
When you leave a job, or get let go from a job, especially you're on a higher level, and you have a nice package there, you need to make sure you bring it with you. You need to get control of that, and get it under a plan administrator who's got your interest in mind, and not the companies interest. A lot of companies are going bankrupt, and going under these days to. And when they go, your money's gone as well. So, you need to make sure you get that protected. My suggestion is, roll it over into something else that you can utilize. And this year, if you can get it into a Roth plan, it's the best time to do it because there's tax breaks related to that, if you can get it rolled in from a regular IRA or other benefits rolled into a Roth.
Some companies, when they needed to use money and they were going under, they somehow neglected to transfer that money that was withheld from your paycheck, or their matching part, into the trustee accounts. So, that's why you need to, if you've been let go of a job and you haven't done that, or checked up on your 401K or pension plan, or whatever it is, you need to do that. You need to make that phone call and find out if the benefits are there that you expect to be there. Some of them may have lost money in the stock market, but you need to find out.
I would suggest to everybody here, is that you get control over your assets. If you have a broker that you're working with, get it under that house where you know what's going on. I would get something where you have control, where it's not under the plan administrator that's attached to the company that you were working with. You want to get it where you're not having to call that administrator and find out what going on with your account, when your dealing with a broker, or somebody you know and trust.
A Couple of Other Things
Some of us may be in a situation where we have been utilizing all of our money to pay our bills. Depending on when you were let go of your job, you may still have some taxable income. Especially if you got some severance, or something like that, and you didn't think about having enough tax taken out. Or, if you haven't had that 10% taking out of your unemployment all along, because as I have said, unemployment is taxable, and that doesn't look like that's going to be changing any time soon. If you have a tax liability and you don't have the money to be able to pay it, there are things you can do. You can make those phone calls to IRS, and get on a plan with them, and get some help. Right now IRS is being much more forgiving because of the Obama administration and some of the directives. They don't want to put people out of their houses and put them under if they don't have to, because they owe federal income tax. But, the best thing to do is proactive with that, and get on top of it up front. If anybody needs some help with any of that, I can help you with that. Or, if you have an accountant or CPA, and you're in that situation, don't get behind the eight ball. Because then you'll start getting those nasty letters. And they're no fun.
Basically on the medical, to be deductible, it has to be over 7.5% of your Adjusted Gross Income. With the situation we're all in, our Adjusted Gross Income is way down compared to the prior year. So you may qualify with those medical expenses this year when you couldn't have before, when you had a bigger Adjusted Gross Income. So that if you do take the retirement money out, that may help you avoid some of those taxes. The Cobra coverage also falls under those medical health insurance expenses, and it's subject to that 7.5%.
The Self Employment Situation
If you are working as a contractor, they can withhold income tax for you if you request it. Most people, they don't. And it depends on how much money you're making there. If you earn more than $600 with any one company entity, then they are supposed to give you a 1099 with non-employee compensation. Which means, that's going to be taxable income to you. Some of these small companies have accountants or people helping them, they may or may not be giving you the 1099. You're still supposed to declare that income on Schedule C. The flip side to the income is, you have expenses you can deduct against that, depending on how you're working and what you're working. You can deduct expenses for your car, the mileage, gas, etc. There's a couple of different ways you can do that, and it's individual. There's calculations to make. You may be able to deduct some of the expenses for your home. If you have an office setup in your home, that you actually are doing the work there. I have an office at home that I'm using.
The home office is something to be careful about, but in today's environment, more and more people are becoming entrepreneurs. More and more small business are coming out of the offices that they had because they can no longer afford to pay the rent, and there's that option in your home. So, the office at home deduction is changing, even as we speak. Those are some of the areas. If you're buying materials and supplies, and things like that. Your cell phone bill may become deductible. Depending on how much you're working and how many hours you're out there. If you're out there networking.
I network 24/7, especially when I first started, in the Business-to-Business groups and groups like this. Everything you do, every trip you make there, that's mileage on your car. Every time you go to one of the luncheons, and/or are buying your lunch, you're marketing and networking. If you're doing any of those things, those things become deductible on a Schedule C. Like, if you're just out there looking for a job, and you're going around to all different head hunter places, or maybe just networking in a place like this. If you have meals, if you have travel expenses, driving expenses, those things are deductible on Schedule A, and they're subject to a 2% floor. So, if you can convert any of those expenses over into a Schedule C deduction, you're better off because you get 100% of them.
Unemployment insurance is payed by an employer with an employee W2 situation, not a contractor working on a 1099. This is one of the reasons why, some of the rules for businesses as corporations have changed over the last number of years. And they're requiring that businesses start paying for themselves unemployment tax and medicare social security, i.e. it will require small business people to take W2's. If you're on a Schedule C, you're not going to do that. If you've actually started a business, then that's one of the requirements now.
If you're working on their site (at another business), you do have some administration, regardless of what you're doing there. You probably have to give them a bill and an invoice, and some of those things. You're going have to utilize something. If you're working for different people, like I got clients all over the place now, and I'm really working from my house. Tax returns, everything. That is a true home office. Sometimes I'm working at a client's because they need me to be there so I can do the work there, teach them and train them. Specifically, it depends on the situation. If you've got a 3 month 1099 job that you're working on, and you're totally at that client, maybe not. You need to look at the percentage of utilization, look at the room. The way you calculate some of that is, the room or the area in your home that you're using compared to the entire square footage your home. For most people, it's going to be between 5% and 15% of the utilization of the home. I have a client that uses almost 25%, because they've moved their offices and their business back into their home. And they need that much of the space. They've moved everything around. And this is what I'm encountering with a lot of people too. So, you're specific situation there would be something you would want to address.
You can be yourself. You don't have to have BBA. You can just be John Smith. And you're doing whatever it is that you do. Like, I'm Jay Majors, and I'm an accounting professional with 11 years of experience, half in the corporate world, half in public accounting, and I could run your company. You can do that. I started myself as Majors Accounting Innovations. And as my business really started taking off more, now I have my own LLC that I'm building and going from. And a lot of people start off that way. That's kind of what I'd recommend. Don't just jump into everything. There's some expenses and costs, and all of that, that you have to carry as you're ongoing.
And if you're going to start a business, there's some issues and considerations with what kind of business you want to start, a Partnership, S Corporation, if you want to remain a Sole Proprietorship. What are your intensions? What are you going to do? Where are you going with it? Is it going to be kind of that side thing while you do want to get into a job? For me, I got to that point where I started taking off, so it was time to jump in with both feet.
One thing, if you guys are thinking about businesses or thinking about doing something like that, Publication 334 and Publication 3207 with the IRS has a lot of information in those areas that may be helpful. If you're thinking about doing it, please come talk to me. I'll help anybody and everybody. I'll tell you where I've been and other clients I have that are some of the same thing, starting their businesses. I can really, really help you all in that area. I'm here to help you, not to charge you, ok.
Some Miscellaneous Deductions
You have to be looking for a job in the same career, in the same class of job, for them to count. If you're switching careers, those job search expenses are likely not deductible. Now who's going to say, "Now I'm switching careers.", right? Who's really going to say that? But, that's one of the things you have to take into consideration. If you're switching careers, it's got to be in the same occupation. If this is your first job, they're not deductible. If you've been out of your job for a very long time, they may not be deductible. Wow! How long is a very long time? They haven't defined that clearly. So, that may be a consideration that you guys want to be thinking about.
You're specifically looking for a job in your field. Everything you were doing was geared toward that. An opportunity came along in another area, and you had transferable skills, and you had to take something. The key is, you were utilizing your time and your efforts looking for a job in your field. And that's what it says. You have to be looking for something in your occupation.
The likelihood of being audited is very slim. People who have lower income, which we all do now, because we don't have jobs, are less likely to be, because IRS has to pay all those auditors a big salary. Are they going to pay them more than what they're ever going to get out of you, to come out and audit you for $5? The reality is, a lot of returns that do get pulled, that do get kicked out, when they do get on somebody's desk, and they flip through them and look at them, they're like, "We're getting nothing out of this." They look at the documents, because the IRS already has all the documents in their little computers, they're like "No, we're not getting anything out of this. What can we possibly tweak?" So, the likelihood is very, very slim. Is it possible? Sure. But some of those factors do play into what the IRS does.
If you're doing things to improve on your skills, if you're doing things to maintain them, if you're doing things that are required by an employer, or new things that are required in your profession, they're deductible. If you're going back to school for another profession, no. Part of the key is, same occupation and same direction of where you're going.
Your preparation of your resume, telephone calls that you're making. You might even be able to use some of your cell phone, that's iffy. Anything you're paying for, recruiting agencies, and things like that, you're mileage going to and from interviews and driving down to the place that's doing the resume for you, or any of those things. Reams of paper that you buy to print out all those resumes that you're printing. For me, I push the envelope on all of those kinds of things, because that's part of what you have to do. If you're traveling, and a lot of the people in this room apparently are getting jobs outside of here. Again, the key is is that it's got to be the same occupation. If you are changing your occupation, and you make that travel to Texas, it's not going to be deductible. The key is, you've got to be looking in your same field, or your same general field. Hotel expenses, travel expenses, airfare, meals, internet.
Networking lunches. If say we did something, our little events that we're going to, whatever you're buying there, if you're having a little drink or your munches. All of that is networking expense, meals and entertainment type stuff. You have to be able to itemize to get those. That was my point earlier. Your income may be down, but it still may not be enough. It's got to come over the 2% floor of your Adjusted Gross Income for you to even be able to utilize them. Whatever is above that is all you're going to be utilize in your itemized. If you doing anything and making some side money, I'd try to push it onto the Schedule C as much as possible. And justify it as business networking or what have you. Because now your income is way lower than it was, you might trigger a few things.
Standard deductions are for your different class of income. And that's always available. But I'm thinking a lot of people in this room have homes and things like that. You may not. You're probably going to be with a standard deduction. I rent, so I was with a standard deduction too. All of my stuff went onto a Schedule C. But for those who don't have a home and don't have mortgage payments, you're probably going to be with your standard deduction. This brings up some of the other issues that you guys may be experiencing with loss of income, with unemployment.
You may be experiencing issues with paying mortgages. There is a difference between debt restructuring and bankruptcy. There's a difference between foreclosure and bankruptcy. There's also a difference between short sales and the foreclosure situation. I don't know if anybody in here is experiencing that. I know a lot of people out there who are. There's some tax consequences for all those different situations. And again, they are different for each one of those situations. And it's going to be specific to your situation and the dollars and cents involved.
If you have credit card bills, and you've called that credit card company and you're making a settlement. Those credit card companies are supposed to send you a 1099-C. And that income is taxable income. That debt forgiveness from the credit card company, if they do forgive some of your debt, is taxable income. I have some clients where they have received some. Some of them have not. I've got a client who's got a situation with their mortgage, and they filled bankruptcy, and some of the debt was forgiven. One of the mortgage companies sent them a 1099. One of them did not. If it's on your home, you're probably not going to have a problem. The problem may come two years from now if you haven't replace that home. Big tax consequences there. If it's on a rental property, your business property, then you're possibly going to have some taxable income associated with the loss. And again, there's a calculation. You may or may not. It really depends on the dollars and cents.
If you're negotiating away credit card debt, and a lot of credit card companies are taking what they can get, and they're doing that, be aware. You may have a tax bill that you did not anticipate having. And the same thing on the house, home, or rental property situation. You need to be very careful and get some good tax advice in that area. Each one of those situations is different, and it really, really depends on fair market value, original cost, how much is the debt forgiveness, and a whole list of different criteria. So, if anybody is thinking about those things, or doing any re-negotiation, or debt restructuring, you may want to talk to some tax counselors as well, or get some tax advice.
Making Work Pay
Have you guys all heard the making work pay credit? And I know everybody is totally confused about it, right? What does it mean? What do I do? Do I have to file that Schedule M? Yes you do. For those of you who did not work during the year at all, or have any earned income, because unemployment is not earned income, you may not qualify for it. If you did have some earned income, you definitely need to file that Schedule M. You may likely get the entire $400 credit. How it worked was, Obama gave us a stimulus payment through our paychecks throughout the year, where everybody got the small reduction in the income tax that was being withheld from their payroll check. If you worked for a payroll. You got it in advance by doing that. And the amount of tax that was withheld was less than it would have been. So now to balance it out you have to apply, you have to tell IRS that "I did not get one of those lump sum payments." And there's certain classes of individuals who got a lump sum payment. Like, somebody who is in retirement, and is on Social Security. They qualified for a $250 lump sum payment. They got the lump sum payment. That's why you have to fill out that form. You guys didn't get a lump sum payment. You got little dibs and drabs out of your paycheck. So the amount that you got zero. And a lot of people think "What does this mean when you look at that form? I didn't get anything. Well, I don't know?" No, you didn't get a lump sum payment. You qualify for the credit. You got the credit in your paycheck as you went along. If you don't apply for that, you're going to have $400 more in tax to pay.
If you get 1099's and you're filling a Schedule C, you have earned income. You need to file Schedule M. You did not get any payment, but you have earned income. And it's related to making more pay, right? So it's considered earned income. Even if you only worked one month. Now there's a calculation, and you may need to get the book. Get your tax counselor or CPA to do it for you. I have the software and all of that stuff at home.
For most people, because of the timing when this was enacted by Obama, it actually started reducing the income tax coming out of your check April 1st of last year. It couldn't come into being until after he came into office. So it was targeted and started, if anybody paid attention, and you were still working then, all of a sudden you got a few more dollars in your paycheck. So be careful with that and make sure you take that.
Earned income credit has nothing to do with itemizing. Many people who never qualified for it before because your incomes were too high. You may qualify for it now, if you had earned income as well as your unemployment. They've expanded the amount that you can earn from that as well. They opened up the doors on a lot of areas, so I would make sure I look at that credit. Have your CPA or your tax person, who ever doing your work, look at that. Most of them are going to have software that's built in that will automatically pick up the calculations. It's a complicated calculation. How many children do you have? How many are you supporting? Do they live with you? All of the different questions.
What's Going on with Legislation
As of the night of March 2nd, we got another temporary extension until March 28th, thereabouts, on kind of an emergency extension. So it's not going to end, or it didn't end on February 28th. Obama signed it into law that night. Now they're wrangling and fighting. And one of the problems we have is that a lot of these issues are in the House Ways and Means Committee. Well, you guys know what's going on there if you've been listening to the news, they're in a big fight. There is a bill that has been in congress for about a year, HR4213. They're trying to get benefits extended until the end of 2010. We don't know if that's going to go. There's one push from one side of the aisle, and one push from another side of the aisle. They're looking at May 31st of this year. So, we need to be tracking and following the House bills in this regard because a number of us are going to be hitting that date.
I'll be hitting my year in mid-May. A lot of you may already have gone well over that. Are they going to do an extension beyond May 31st? I think we are at least going to get that from everything I'm reading. If the Democrats have their way, and even some of the Republicans, because some of these bills are actually sponsored by Republicans, we may get it through December 31st. Send an email to your Senators and your Congressmen telling them to vote for it. Telling them what you need.
One of the other areas that I had tracked from the last time I spoke to you guys, there's been another bill, HR155, that's been sitting there. It's still sitting in the House Ways and Means Committee. It has not been acted on, but it is still there. And that would make our unemployment benefits 100% non-taxable. Would that be interesting for everyone to follow? Yeah!
You may be hitting the point where it's running out. I know a lot of you in this room have been out of work for well over a year, so it's a concern and something you need to follow. I'll tell you, if you want to follow it through the Congress, HR4213 is the bill number. If you want to go online and Google it or look it up, and try to follow what's going on, you can do that. That's going to tell you what they're going to do. Are we going to get it for May 31st or December 31st? I'm hoping that in the next couple of weeks they're going to have some settlement on the issue.
Now the other one that I had mentioned, that would make unemployment non-taxable is HR155. And it is still sitting in the House Ways and Means Committee. If you go to the House Ways and Means Committee, look up the list of the bills. There's a few pages of them. Of bills sitting there to be acted on, or considered again, or reconsidered. This is one of them. They're listed by number. I have research tools and I can find out all of this stuff. Those are some things you may want to tap into.
There are some tax benefits for companies who are hiring or will hire unemployed people. The idea is, they want to get unemployed people back working.
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Thanks for the input
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