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As if being unemployed isn’t difficult enough, unemployment benefits are taxable, which can just add to the financial burden. It may seem like the unemployed can’t catch a break, but the IRS may have a heart (even a small one) after all. In early March of 2012, the IRS made an announcement stating they planned to expand on the 2008 ‘Fresh Start’ program. If you aren’t familiar, this program was put in place to help Americans who were struggling financially and who were behind on their taxes.
Under the expansion of this program unemployed taxpayers who aren’t able to pay their taxes by the April tax deadline will be eligible for a six-month grace period before the IRS begins imposing the failure to pay penalty. While it doesn’t provide a grace period for filing your tax return, you can still file for an extension so that you can also avoid the failure to file penalty, which is a much stiffer penalty than failing to pay on time.
Typically, when you don’t pay your taxes by the tax deadline the IRS will begin assessing the failure to pay penalty which is currently set at 0.5 percent each month on the total tax owed. That means this grace period can potentially buy you enough time to save a three percent penalty on your taxes owed. Sure, that may not sound like much, but when you’re unemployed every dollar counts.
To qualify for this tax relief you must have been unemployed for at least 30 consecutive days in 2011 or 2012. If you are self-employed, you must have realized at least a 25% reduction in income. If either of these situations describes you, you’ll need to file Form 1127A so you can take advantage of the grace period.
This penalty relief is subject to income limits. A taxpayer’s income must not exceed $200,000 if he or she files as married filing jointly or not exceed $100,000 if he or she files as single or head of household. This penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.
File on Time No Matter What
One of the worst things you can do as a taxpayer is to file your taxes late. People think that just because they don’t owe the IRS any money or because they can’t afford to pay what they owe that they can just kick it under the rug and deal with it later. This is a big mistake.
That’s because the IRS failure-to-file penalty is incredibly stiff compared to just not paying what you owe on time. This penalty is a whopping five percent for each month the tax return is late, up to a total penalty of 25 percent. Compare that to the failure-to-pay penalty which is just half of one percent per month.
So whatever you do, even if you know you can’t pay the IRS on time, file your return on time. If you can’t file your return accurately and on time then be sure to file an extension. An extension won’t also extend the time you have to pay, but as highlighted above, it’s a lot less costly to put off paying a few months compared to not filing for a few months.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.