Filing your tax returns recently must have made it clear to you that many tax laws are complicated and confusing. Most of the mistakes in filing tax returns happen because of misunderstood rules. You need to start planning your finances right now to have the least possible tax obligation next year. This article will help you in planning your finances by demystifying some complex tax laws.
Taxability of unemployment benefits
Most people do not realize that unemployment benefits are considered wage income and are taxable. If you are applying for unemployment benefits, you must consider withholding of tax by the government. The rate is 10% and you will have to fill out W-4V, a Voluntary Withholding Request form or a similar form given by the paying agency. If you want to get the entire unemployment benefit without tax being withheld, you would have to pay income tax on it at the end.
Tax on alimony
One thing that adds to the stress of a divorce is the tax one needs to pay on the alimony received from an ex-husband or an ex-wife. Remember that all separate maintenance payments, alimony and other compensation from your ex-spouse will be taxable. However, child support money is not taxable and it is wiser to push for more child support money during divorce negotiations. The good news is that if you are paying alimony instead of receiving it, then you can deduct the amount from your taxable income.
When you get a part of your principal or debt obligation reduced from the lender, remember that you will have to pay tax on the reduced amount as it is considered income earned by you. You will get Form 1099-C or a similar form from the lender which will classify your cancelled debt as miscellaneous income.
You can get tax relief of up to $2 million on a mortgage debt for primary residence, or $1 million if you are married and filing a separate return. This relief is only applicable for debt that is forgiven between 2007 and 2012. If you want to take advantage of this tax relief, start negotiating for a reduction in your mortgage debt.
These tax laws should be kept in mind when working on your finances throughout the year. Keep a track of the latest tax breaks applicable to you, as they’ll help you in significantly reducing your tax expense.