Financial distress can significantly impact your tax situation, with options available to manage tax debt and implications for canceled debts and retirement savings.  In this guide, we will cover:

  • Overview of tax issues commonly faced during financial hardships
  • IRS resources and programs designed to assist those in financial distress
  • Strategic tax considerations to minimize additional financial strain

Addressing Tax Debt

  • Options for Paying Off Tax Debt
    • Installment agreements, temporary delays of collection, and offers in compromise
  • Penalties and Interest on Unpaid Taxes
    • Understanding potential charges and how to mitigate them

Tax Implications of Canceled Debt

  • The Insolvency Exclusion
    • How insolvency affects reportable income from canceled debts
  • Form 982: Reduction of Tax Attributes Due to Discharge of Indebtedness
    • Reporting and applying the insolvency exclusion

Retirement Savings in Financial Distress

  • Early Withdrawal from Retirement Accounts
    • Taxes and penalties associated with early distributions
  • Loans vs. Distributions
    • Comparing the tax impact of borrowing against or taking distributions from retirement accounts

Lost Income and Tax Credits

  • Claiming Unemployment Benefits
    • Taxation of unemployment insurance
  • Eligibility for Earned Income Tax Credit
    • Qualifying for EITC during periods of low or no income

Foreclosure and Repossession

  • Tax Consequences of Losing a Home or Property
    • Reporting foreclosure or repossession and calculating possible income inclusion
  • Mortgage Forgiveness Debt Relief Act
    • Conditions under which forgiven mortgage debt may not be taxable

Final Thoughts

  • A proactive checklist for managing taxes in financial distress
  • Key IRS publications and forms for financially distressed taxpayers
  • The role of tax professionals and financial advisors during financial upheavals


Detailed Bullet Points for the IRS Sections:

  • IRS References:
    1. Tax Debt Payment Options: IRS Topic No. 202 (Tax Payment Options)
    2. Canceled Debt and Insolvency: IRS Publication 4681 (Canceled Debts, Foreclosures, Repossessions, and Abandonments)
    3. Early Retirement Withdrawal Penalties: IRS Topic No. 557 (Additional Tax on Early Distributions from Traditional and Roth IRAs)
    4. Unemployment Compensation: IRS Topic No. 418 (Unemployment Compensation)
    5. Earned Income Tax Credit: IRS Publication 596 (Earned Income Credit)
    6. Mortgage Forgiveness: IRS Publication 4681 and the related sections discussing the Mortgage Forgiveness Debt Relief Act and debt cancellation