The “What If” Tax Questions of an Economic Downturn

What if I lose my job?  Is my unemployment check taxable? Can I afford to take money out of my retirement account? These are just a few of the “What If” questions people are dealing with these days.

The IRS recognizes that many people are going through difficult times financially.  Often, there is a tax impact to events such as job loss, debt forgiveness or dipping into a retirement account.  If your income has decreased, you may even be eligible for certain tax credits, such as the Earned Income Tax Credit, which can mean money in your pocket.

Most importantly, if you believe you may have trouble paying your tax bill, contact the IRS immediately. There are steps the IRS can take to help. To avoid additional penalties, you should always file your tax return on time even if you are unable pay your tax bill.

Here are some “What if” questions that are answered on the official IRS Web site.  Simply go to and type the keywords “What If” in the “Search” box at the top of the page.

  • Job Related
    What if I lose my job?
    What if my income declines?
    What if I withdraw money from my IRA?
    What if my 401(k) drops in value
  • Debt Related
    What if I lose my home through foreclosure?
    What if I sell my home for a loss?
    What if my debt is forgiven?
  • Tax Related
    What if I can’t pay my taxes?
    What if I can’t pay my installment agreement?
    What if I can’t resolve my tax problem with the IRS?
    What if I need legal representation to help with my tax problem but can’t afford it?

Remember. to access the genuine IRS Web site be sure to use .gov.  Don’t be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is

Consumer Spending Down, But Savings Rates Up

Consumer spending fell in December, making it a six-month slid officially. Experts expect that consumer spending will continue to remain weak this year as people worry about layoffs and pay cuts. Since consumer spending is so important to a healthy economy, this will almost certainly prolong the ongoing recession.

The Commerce Department release official data that confirmed that consumer spending dropped 1% in December, slightly more that the 0.9% drop that was expected. Incomes dropped 0.2 percent in December, continuing a three-month slide.

Are you saving or spending?
Are you saving or spending?

More from the NYT:

Americans worried about the possibility of more job cuts increased their savings rate to 3.6 percent of their after-tax incomes in December. That was the highest level since tax rebate checks temporarily pushed the rate up to 4.8 percent in May.

For the year, consumer spending rose 3.6 percent, the smallest annual increase since 1961. Incomes rose 3.7 percent, the weakest gain since a 3.2 percent advance in 2003.

American families are struggling with an intensifying recession that began in December 2007. Overall growth plunged at an annual rate of 3.8 percent in the fourth quarter of 2008, the biggest quarterly decline since a 6.4 percent drop in the first quarter of 1982.

The hard times are being made more severe as consumers cut back on their spending, which accounts for about 70 percent of total economic activity.

The savings rate for all of 2008 rose to 1.7 percent. While historically low, it is well above the savings rates of recent years when soaring home prices and a booming stock market made Americans feel more wealthy and less concerned about saving.

The savings rate had dipped to a low of 0.4 percent in 2005, the peak of the housing boom. That was the lowest annual savings rate in seven decades. Savings had turned negative during the depths of the Great Depression.

For December, the 1 percent drop in consumer spending represented the sixth consecutive decline, a stretch not seen since the government began keeping monthly records on incomes and spending a half-century ago.

Welfare Benefits Flat Despite Worsening Economy

Despite the worst economic climate in decades, welfare aid is not growing as one might expect.

Even though the number of people seeking unemployment benefits continues to rise, the number of people receiving cash assistance via a government welfare program was the lowest in more than 40 years.

From the NYT:

Michigan cut its welfare rolls 13 percent, though it was one of two states whose October unemployment rate topped 9 percent. Rhode Island, the other, had the nation’s largest welfare decline, 17 percent.

Of the 12 states where joblessness grew most rapidly, eight reduced or kept constant the number of people receiving Temporary Assistance for Needy Families, the main cash welfare program for families with children. Nationally, for the 12 months ending October 2008, the rolls inched up a fraction of 1 percent.

Back in 1996, when President Bill Clinton signed into law the Temporary Assistance for Needy Families (TANF) program, critics suggested that the new time limits and work requirements for welfare assistance would discourage people from seeking government help when they needed it most. During the boom economy that followed, the program received much praise, but the lower caseloads now may prove that the obstacle-ridden program may indeed be discouraging poor people from getting help.

Others suggest that low-paying jobs have initially been spared as the economy has turned south. Other hypothesize that despite job losses, the country may be experiencing lag time before people hit hard by the economy turn to the government for help.

More from the NYT:

“There is ample reason to be concerned here,” said Ron Haskins, a former Republican Congressional aide who helped write the 1996 law overhauling the welfare system. “The overall structure is not working the way it was designed to work. We would expect, just on the face it, that when a deep recession happens, people could go back on welfare.”

“When we started this, Democratic and Republican governors alike said, ‘We know what’s best for our state; we’re not going to let people starve,’ ” said Mr. Haskins, who is now a researcher at the Brookings Institution in Washington. “And now that the chips are down, and unemployment is going up, most states are not doing enough to help families get back on the rolls.”