How do you cope with tax inequality?
April 17, 2012 5:27 PM   Subscribe

I'm broke, can't find work, and owe more taxes than Bank of America. Help me deal with the financial and emotional fallout.

I know you're not my accountant, (BECAUSE I CAN'T AFFORD ONE) but can someone calmer with better math skills please help me figure out what I'm doing wrong?

I lost my job and have been living on unemployment insurance. I'm grateful to have it, but it's a loss of nearly 2/3's of my previous income.

Despite this, I owe $1500 more in federal income taxes than the previous tax year, when I was employed. That's a debt equal to about a month's income and I haven't even looked at my state taxes yet. I'm filing single income in California.

I already stretched paycheck to paycheck and I'm beyond resentful, but I'll set up a payment plan and start having taxes withheld from my UI payments. But I still feel like this can't possibly be right.

Are there secret deductions everyone but me knows about? Is everyone else smart enough to have an 'arrangement' with a tax preparer? Am I the only fool with a low five-figure income paying high four-figure taxes? How do I get my financial house in order? What do I do with this seething resentment?

I find it really hard to believe that people living paycheck to paycheck just suck it up and pay the bill. What does everyone know that I don't?

Any tax tips, referrals or soothing words you can provide are appreciated.
posted by anonymous to Work & Money (17 answers total) 2 users marked this as a favorite
That can't be right. Did you use turbo tax or do them by hand?
posted by fshgrl at 5:31 PM on April 17, 2012 [1 favorite]

File your taxes and apply for a payment plan at the IRS website. Look for a free tax clinic in your area to review your return ASAP and see if they can
find some additional deductions or errors.
posted by humanfont at 5:34 PM on April 17, 2012 [1 favorite]

When you say you "owe more" do you mean you're writing a check for more or that your total tax liability is more?
posted by HuronBob at 5:36 PM on April 17, 2012 [2 favorites]

Unemployment insurance income is 100% taxable, unfortunately. Setting up a payment plan and having taxes withheld in the future are your best options, aside from finding a job, of course. I wish you luck in your job search.
posted by erst at 5:37 PM on April 17, 2012 [2 favorites]

Yes, not having your taxes withheld from unemployment payments is likely the culprit.

For what it's worth, if you made any contributions to a 401(k) last year, you can deduct a certain amount of that; if you're willing to itemize and made significant contributions to charity, that could also be helpful.

And you should really see what TurboTax says... I feel your pain, Anon. I got audited a few years back and it was HORRIBLE, so I know from IRS woes.
posted by Unicorn on the cob at 5:41 PM on April 17, 2012

I would consider filing an extension, but make sure you understand the consequences fully. It could buy you some time at a cost, but it might be worth it to keep the money on hand if you think you might be able to find work between now and then.
posted by feloniousmonk at 5:43 PM on April 17, 2012

What erst said, pretty much. You owe more this year because taxes are not taken out of unemployment checks. You don't need an accountant, but you should pay a little now and apply for a payment plan.

I asked a similar question last week, and while my situation is slightly different, some of the advice in that thread, especially the last answer, were extremely helpful. And definitely call the IRS at 1-800-829-1040. It's suprisingly easy to get a real, live human being on the phone.

If you're not using TurboTax, I highly recommend it. I also highly recommend sucking it up and paying the $15 for them to file your state taxes.

Even if you file for an extension, you still have to pay (or pay what you can and set up an payment plan with the IRS) now. If you have super amazing credit, you could put it on a credit card, but unless you have a really low APR, the IRS interest rate are lower.
posted by ablazingsaddle at 5:46 PM on April 17, 2012

Yeah, to clarify, if you file an extension, you don't get a grace period from paying, but you are not failing to file that way, and you have the opportunity to maybe get some professional help and all that before you do file. Less any potential deductions a pro might find, if you wait to pay until you file, you will owe more than you would normally due to the late payment. Given the amounts involved it's not going to be a huge sum, but it's non-zero.
posted by feloniousmonk at 5:53 PM on April 17, 2012

From the OP:
Thank you so much for your quick answers: Here's add'l info:

1) I used H&R Block's free website for both 2010 and 2011.

2) By 'owe more' I mean in 2010 I paid $280 on appx 60K of income vs in 2011 I owe $1780 for appx $22K of benefits

3) I have no 401(k), but will check out TurboTax
posted by mathowie at 6:07 PM on April 17, 2012

What was your total tax for 2010? You likely ended up with a net liability of $280, but your actual tax was higher (you just had taxes withheld). Many benefits do not automatically withhold taxes, thus you're left with a larger bill at the end of the year. You can set up a payment plan. Also check out the Fresh Start IRS initiative.
posted by melissasaurus at 6:15 PM on April 17, 2012

By 'owe more' I mean in 2010 I paid $280 on appx 60K of income vs in 2011 I owe $1780 for appx $22K of benefits

In 2010 the extra amount you had to pay at tax time, in addition to the amount you had withheld during the year, was $280.

In 2011 the extra amount you had to pay at tax time, in addition to the amount you had withheld during the year, was $1,780.

If you had $10,000 withheld from your paycheck in 2010 (not unreasonable) and $0 withheld in 2011, then your tax burden would actually have been $10,280 in 2010 and $1,780 in 2011.

Can you look at your 2010 and 2011 tax forms and see what your total taxes for the entire year were (not just how much you had to pay on April 15 to make up the difference)?
posted by dfan at 6:19 PM on April 17, 2012 [6 favorites]

Did you pay any student loans last year? Maybe this is Captain Obvious 101 (and in that case, nevermind) but be sure to deduct the interest, if so. It can help a LOT.
posted by aintthattheway at 7:14 PM on April 17, 2012

What dfan said. It's extremely unlikely your total tax on $60K was $280, that was just the amount you paid at tax time and was only a small amount over what was withheld, which went toward your tax but you didn't feel it because it wasn't one lump sum. With the unemployment, you didn't have tax withheld so you are paying in a large lump that you feel much more, but you're not paying more overall.
posted by rabbitrabbit at 8:57 PM on April 17, 2012

Unemployment insurance income is 100% taxable, unfortunately.

This is true for federal taxes, but the good news is your CA EDD income is not taxed by the state of California. Go ahead and run your 540, you might have a refund waiting that you can use to ease the sting from your 1040 balance due.
posted by jamaro at 9:18 PM on April 17, 2012 [1 favorite]

Re: California, I've said it before and I'll say it again: don't set up an installment plan with CA if you can help it, if my experience is at all typical. I don't know what your credit situation is, but the late fees they charged me for the period when they lost my paperwork were probably more than I would've paid in credit card interest.
posted by salvia at 11:35 PM on April 17, 2012

soothing words

There's a big computer sitting in a data centre somewhere adding numbers to other numbers, and those numbers are attached to a number that is associated with you.

Everyone is panicing right now and trying to squeeze the hell out of everyone else for what they're 'owed'. Fear is the common motivator for that, and fear is everywhere. As if being broke wasn't bad enough, unemployment is corrosive.

As if unemployment wasn't bad enough, the bills keep piling up. Maybe you feel like you're drowning. Maybe you feel as if each day that goes by, your getting deeper into a hole. Perhaps your faith in yourself and your future are being shaken. You may have the feeling of being lost or stuck.

The advice above is good, on how to handle the IRS aspects of it. Plently of people are helping you sort out your options. The IRS will be very nice as long as you show the intent to pay. Their weapon is fear, they wield it well, and as long as you continually show you are willing to work with them and you are not willfully in this situation, they will be nice. More than once, I have found myself wishing that the rest of the world had customer service staff as courteous as the IRS. They're not bothered if you pay now, just don't act like a dick and get all cray on them.

As far as how to handle your emotions about this situation, get very clear on what you can and cannot control. You cannot will yourself out of this situation, otherwise you would have. So accept that you are doing what you can and it's going to take time.

Once you have accepted that, make a concerted effort to sort it out as soon as you can and continue the path forward. Finally, once you have done that, relax. Enjoy the air, the sun, the rain, the experience of being alive. You friends, your family. You cat. Someone else's cat. People watching.

The world is filled with brilliance and wonder. Simply being alive is momentous, if you can manage the fear. That corrosive fear. It helps to adopt presence. Any moment where you feel stressed, look at what you have in front of you, be grateful for it, and be happy to be alive. It sounds silly, but it works. Some people may say finding peace in struggle is irresponsible or escapist. It's really the onyl tactic that makes sense, for futile actions will destroy the spirit almost as fast as corrosive fear.

Also, take confidence in the fact that you are not alone. 8% of the country – 30 million people – are out of work and running out of money. Depersonalise this, because it's not a YOU problem, it's a WE problem. YOU did not choose this. It has happened and now you have to deal with it, but it's not your fault. This is nothing less than an economic reorganisation and you happen to have a front row seat to it. You are still worthy of dignity and happiness, and in time, this too will pass.

How's that? Hope you feel a bit soothed.
posted by nickrussell at 4:07 PM on April 18, 2012 [2 favorites]

By 'owe more' I mean in 2010 I paid $280 on appx 60K of income vs in 2011 I owe $1780 for appx $22K of benefits

Am I the only fool with a low five-figure income paying high four-figure taxes?

You did not pay only $280 of taxes on $60k of income. That's 0.4 percent of your income. In 2010 your employer prepaid your taxes ahead of time. Most likely you're used to looking at the part of the paycheck that says what you goes to your bank. Those are post-tax numbers, and it turns out that unemployment benefits are pre-tax (gross). In contrast, $1780 is a reasonable tax number for an income of 22k. (BTW, how is that "high four figure?") Mathematically, your tax owed works out to less than 10 percent, in line with the tax brackets.

10 percent is not very high, but if you had earned income (but not too much) there are a couple neat credits and deductions available that might move that liability towards zero: a 50 percent tax credit for retirement account contributions and the Earned Income Credit come to mind off the top of my head. It's unfortunate for the unemployed, but I figure tying these benefits to employment was politically necessary to have them at all.

How do I get my financial house in order?

So obviously you have two very unfun things to do. First, figure out how you'll set up a payment plan, and secondly, figure out how to make ends meet while paying last years taxes and saving up for next year's taxes. A miserable double whammy. Remember, if you do nothing different, you'll be in the same damn spot this time next year.

I can't give you much advice on specific ways to save money without specific budgets, aside from maybe making your next annual budget pre-tax. And I guess suggesting that with no job or dependents tying you to the area, it might be worth your time to look into moving somewhere cheaper. Yes yes, I know; how dare I suggest such a thing, moving isn't cheap, all your friends, etc. But you gotta use your competitive advantage, and mobility is a big one right now. Lots of people are tied up in underwater homes, or have a working spouse they'd need to place to consider a move.

What do I do with this seething resentment?

That is a good question. Perhaps you can find out how much more you forked over in 2010, get even angrier and vote Republican? Or you can be thankful that Uncle Sam lent you an extra $1700 for a little bit while you were down on your luck... More constructively, you could write a letter to your state legislature asking them to educate UI recipients about their tax liabilities, or set up some kind of withholding system.

And uh, maybe give yourself a head start on taxes next February. That'll reduce the amount of adrenaline / panic / anger that no amount of logic and math can subdue.
posted by pwnguin at 11:50 PM on April 18, 2012

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