What if I can't pay my taxes?
If you cannot pay the full amount you owe by the April deadline, file your return by the deadline and pay as much as you can to avoid penalties and interest. Also, contact the IRS at 1-800-829-1040 to discuss payment options. The agency might be able to provide some relief, such as a short-term extension, installment agreement or offer in compromise. In some cases, the agency may be able to waive penalties. However, it will not waive interest charges that accrue on unpaid tax bills.
Where are the forms?
Kentucky is mailing out fewer state tax forms this year. The state is saving approximately $230,000 by having taxpayers print their own forms. All tax forms can be downloaded and printed at the Department of Revenue's Web site, http://www.revenue.ky.gov/.
Taxpayers without computer access can have forms mailed by calling (502) 564-3658. The department is mailing packets to those taxpayers who used their address label this past filing season and is continuing to mail non-resident packets.
This year, the IRS is expanding its Free File program, and some of the tax software companies are eliminating fees. TurboTax, for example, will let you electronically file five federal returns free when you purchase the boxed software program. Same with TaxCut 2008, H&R Block's software. The IRS estimates that 98 million taxpayers will be eligible to use the software-based part of its Free File in 2009, when the maximum adjusted gross income rises from $54,000 to $56,000. The program is available in English and Spanish.
There's another option if your income is above that. Free File Fillable Tax Forms are basically paper tax forms on the computer. You put in the data on your own and the program does the basic math. You can file it electronically regardless of income.
In addition to getting a refund quicker, there's another big advantage to filing electronically: The most common errors on tax returns are mathematical, and tax-preparation software programs do the math for you.
What if I lost my job?
Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time also are taxable. You should ensure that enough taxes are withheld from these payments, or make estimated payments to avoid a big bill at tax time. Public assistance and food stamps are not taxable.
If you didn't get an electronic stimulus check in 2008, or if you got less than the maximum but later lost your job, you might be eligible for the rebate now. The IRS will figure the rebate for you, or you can do it yourself using the Recovery Rebate Credit Calculator at www.irs.gov or the worksheet included in instructions for Form 1040.
And you might be able to deduct certain expenses related to a job search, even if you do not get one. Expenses could include travel, résumé and outplacement agency fees. Moving costs for a new job at least 50 miles away from your home might also be deductible.
What if I lost my home through foreclosure?
Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers generally can exclude income from the discharge of debt on their principal residence or mortgage restructuring. This exception does not apply to second homes or vacation homes.
However, because Kentucky has not adopted this legislation, any mortgage debt forgiveness will still be considered income for Kentucky purposes and subject to Kentucky tax. A Schedule M adjustment must be made on Part 1, Additions to Federal Adjusted Gross Income, line 6 to report this income.
What about first-time home buyers?
First-time home buyers are eligible for a maximum credit of $7,500. But there's a catch: The credit is actually an interest-free loan that must be paid back over 15 years. If you take the full credit, you will have to pay back $500 a year. If you sell the house before the 15 years is up, the full amount will be due.
To qualify, taxpayers cannot have owned a home in the previous three years and must use the property as their principal residence.
Like many tax credits, this one is phased out at higher incomes. Use Form 5405 to file.
If you bought a hybrid vehicle to escape the high cost of gas, you could be eligible for a federal credit. But you can no longer get a credit for energy-efficient water heaters, furnaces, windows or other items. However, if you installed a small wind turbine, solar panels, fuel cells or a geo thermal heat pump to generate energy, you might be able to get a credit for part of the cost.
If you're covered by a retirement plan at work, the maximum modified adjusted gross income you can have and still take a deduction for IRA contributions rose to $63,000 — $105,000 if married filing jointly. The maximum deduction is $5,000, $6,000 if you were 50 or older by the end of 2008.
In 2009, the income limits increase again, to $65,000 or $109,000 on a joint return.
The limit on elective deferrals to a traditional or safe harbor 401(k) plan is $15,500 for 2008 and $16,500 for 2009.
Alternative Minimum Tax
The Alternative Minimum Tax was designed to ensure that all Americans were paying some taxes, especially those wealthy folks who seemed to be escaping them altogether. The problem was, middle- and upper-middle-class taxpayers were the ones getting hit by it, especially as incomes and inflation rose. To help soften the blow, Congress has put in place a series of patches to account for inflation, raising the exemption level for the AMT. The 2008 patch was included in legislation designed to rescue the nation's financial system.
For 2008, the exemption rises to:
■ $69,950 for a married couple filing a joint return and for qualifying widows and widowers.
■ $34,975 for a married person filing separately, up from $33,125.
■ $46,200 for singles and heads of household, up from $44,350.
Under current law, these exemption amounts will drop to $45,000, $22,500 and $33,750, respectively, in 2009. Form 6251 and the AMT Calculator provide more information.
Earned Income Tax Credit
More people also could end up qualifying for the Earned Income Tax Credit, which is designed to offset the cost of Social Security contributions for low- and moderate-income workers. The credit is refundable — you still can get it even if you owe no tax. The IRS has estimated that a quarter of those eligible for the credit don't take it.
The maximum earned income tax credit was raised to:
■ $4,824 for people with two or more qualifying children.
■ $2,917 for those with one child.
■ $438 for people with no children.
Maximum income levels also are up:
■ $41,646 for those with two or more children.
■ $36,995 for people with one child.
■ $15,880 for those with no children.
Beware the kiddie tax
Those who try to shelter investment by putting it in their children's names should beware. There's a change in the kiddie tax. Previously, only children younger than 18 were affected. That was expanded this year to affect those younger than 24. See Form 8615 for more information.