Short Sales - What you need to know about mortgage debt forgiveness.
With the value of properties dropping over the last couple of years many people have been forced to sell their homes for less than they owe on the property. When this happens, the bank can require that the people who owe the mortgage still owe the outstanding balance or it can forgive the outstanding amount, called mortgage debt forgiveness. While having the bank forgive the outstanding mortgage balance sounds great, there are other considerations that you need to think about first.
Generally, any debt that has been forgiven is considered taxable income by the IRS. However, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007 which forgives taxes on the amount of mortgage forgiveness if a few conditions are met. First, the property sold on which mortgage forgiveness was given must have been the taxpayers primary residence. Second, if the debt forgiven was for a refinance, the income from the debt forgiveness can only be forgiven if the refinance was used to improve or repair the primary residence. Thus, if you refinanced and used the money to pay off credit cards or other debt, the debt forgiven would still be taxable as income for IRS purposes.
Free Income Tax Preparation
Did you make less than $49,000 last year? Are you 60 years or older? If so, you qualify for free income tax preparation from the Internal Revenue Service.
VITA and TCE are two programs implemented by the Internal Revenue Service to help low income and elderly taxpayers file their income taxes for free. There are thousands of sites throughout the United States where taxpayers can come and get their taxes prepared.
To see a place near you, stop by www.irs.gov and search for VITA or TCE to see where the closest tax preparation location is.
If you decide to get your taxes done at one of these places, you need to gather together your documents for the preparers. So what do you need to bring with you? First, you need to bring your social security card and the social security card for all your dependents and your spouse. You also need to bring your W-2, 1099s, and any other statements you received that show the income you earned last year. If you have a mortgage and paid interest last year, you also need to bring in the year end statement your mortgage company mailed you. This will show the interest you paid on your mortgage, your property taxes, and also the insurance you paid on the property last year.
If you don’t qualify for having your taxes prepared by one of these programs, check out www.irs.gov/freefile to see if you qualify to file your taxes for free using online software.
Have you tried e-file?
Tax time is quickly approaching. While many people dread this time of year, it isn’t that scary if you know what you are doing. One way to make tax time less scary is to prepare your taxes with software. There are plenty of great softwares available that will walk you through the steps to prepare and file your taxes. In fact, you can find several online software options on the IRS website, www.irs.gov.
If you don’t want to do your taxes yourself, you can also check out the irs website to find your local VITA. VITA is volunteers who will do your taxes free of charge, but you must be check to see if you will qualify for the free service.
Tax time may seem scary, but there are plenty of great options available to make the process a bit easier.
Where are your records?
Tax time is rolling around again so what can you do now to ensure a less painful tax preparation this year? The easiest thing to do is keep a record of your transactions. Sounds easy but we all forget to save those receipts or print out those statements.
What records and receipts should you be keeping? Well, did you purchase a car in 2009? If so, keep that receipt as you may be able to deduct the sales tax you paid. Did you buy or sell stocks? You need to know what your basis was in those stocks, which again means that you need to know what you paid for the stock, the commission you paid to purchase the stocks, and any stock dividends you received that were reinvested in stocks. This might not be too bad if you only make one or two stock purchases a year, however, once you reach the level where you buy and sell stocks several times a month, this can be a nightmare.
Other receipts that you might want to save are your medical receipts. For example, you need evidence to show how much you paid for the year in after tax dollars for your medical premiums. You also want to save receipts for copays, prescriptions, and other medical expenses. Many stores make this easier now by showing you at the bottom of the receipt the amount that qualifies as a medical expense.
Do yourself and your tax preparer a favor and keep your receipts and print out and save your monthly statements. You can make life even easier by sorting the receipts and statements out by category, at least you can do that if your New Year’s resolution was to get organized.
Gambling Gets Expensive
The Internal Revenue Service issued a decision this week that casual gamblers recognize wins or losses when they redeem their tokens. This means that if you go gambling for the weekend and have a win on the first day and then lose money on the second day, each time you cash in your tokens is a separate recognition event for income tax purposes. Thus, if you turn in $200 for chips and then walk out with $800, the $600 is your win and must be added as income when you complete your taxes, even if you gamble other times throughout the year for a loss.
Tis the Season to Save . . . On Taxes!
Everyone hates paying taxes. We all accept it as inevitable but look for ways to reduce our tax liability. Luckily for us, the IRS offers incentives in the form of tax deductions. Some common deductions include charitable contributions, interest on your home mortgage, and interest on your student loans. While you may have no control on when you pay your mortgage and interest, you do have control on when you make charitable contributions.
Basically we are talking about the time value of money. You get the same tax deduction for your charitable donations whether you make them all in January, throughout the year, or all on December 31. This allows you to use your money throughout the year instead of letting someone else use it.
Some people might want to make charitable deductions but are afraid that if they don’t make them in little contributions throughout the year, the money will be spent come December and they will lose out on the deductions. If you are really serious about making charitable contributions but also not wasting your money, put aside the money you want for charitable contributions each month in a savings account. This allows the money to collect interest, which you can use for yourself, or you can add it to your charitable contributions at the end of the year and get even more tax deductions. Either way, you have the money to make your charitable contributions, you got the value of having the money for the entire year, and you still get your tax deductions.
Financial Fortunes
Understanding finances and how to keep track of your finances can make or break your business. Keeping track of your finances is especially important for small cash based businesses. It is very easy to forget or lose track of what you make, the taxes you need to pay on your sales, and what was sold if you don’t develop a system to keep track of everything. This can land you in hot water not only with the IRS and your state, it will also make it hard when you need investors or try to get a loan from a bank.
Many small businesses don’t realize the importance of keeping good records. They want to try and hide some of their income in order to keep taxes down. However, while this might save them a few dollars in the short term, this gamble could really hurt in the long run. If the IRS finds out that you are not properly reporting all your income, including any cash tips or sales from other items that are not the main part of your business, they will not only collect the back taxes for that income, they will also impose fines and charge interest on the back taxes owed.
There are plenty of good accounting systems available that will help you keep track of your inventory, sales, invoices, expenses and income. I frequently use Quickbooks. Ask your accountant or other business owners for what they recommend.
New Roth IRA Rules Postpone Income Reporting
On January 1, 2010 the rules for converting a retirement account to a Roth IRA are changing. Currently, people can only convert their accounts to a Roth IRA if they have a modified adjusted gross income of $100,000 or less and must not be filing their taxes as married filing separately. Under the new rules, people will be able to convert their other IRAs to a Roth regardless of their income levels. In addition, their is an option that allows report half the income from your conversion in 2011 and the other half in 2012 rather than reporting all of it in the year of conversion as required under the current rules.
Who is an employee?
When starting a business, there are many questions you need to ask yourself. One that you probably haven’t thought about is who is an employee of the business. It is important to know who the IRS considers an employee because the business needs to pay payroll taxes on all income that individual earns as well as federal and state unemployment tax. While these may not seem very expensive when the employee only earns minimum wage, however, if you make the mistake of claiming the individual is an independent contractor when the IRS determines he is an employee, not only do you have to pay the back taxes, you will also be required to pay interest and penalties, which can quickly add up.
When determining whether or not a person is an employee or an independent contractor, the IRS looks at financial control, behavioral control, and the relationship between the parties. When looking at financial control, they will look at whether or not the person had a significant interest in the his work. For example, if the person was paying his own expenses or has a significant investment in his work, he is likely to be an independent contractor. When looking at behavioral control, the IRS look at the extent of instructions the person is given to fulfill his job or the training the job provides. The more instruction or training the company provides, the more likely that the IRS will find the person is an employee. When looking at the relationship between the parties, the IRS looks at whether or not the business pays the person benefits or whether there is a written contract between the parties stating their intent that the person be treated as either an independent contractor or an employee.
The IRS says that not one of these factors is controlling, They look at the totality of the facts. If you still have questions about whether or not the person walking for you is an employee or an independent contractor, you can file Form SS-8 with the IRS requesting that they make a determination whether the person is an employee or an independent contractor.
Tax Deduction for Business Start-up Expenses
When starting a new business, there are plenty of expenses. You have to file a fictitious name with your state. If the business is going to be a partnership, corporation, s corporation or LLC, you need to file with the state and pay for someone to create articles outlining how ownership is divided, what rights and responsibilities each person has, how you can make changes to the articles, and much more. It takes money to do these things.
Section 195 of the Internal Revenue Code allows businesses to deduct these start-up expenses, up to $50,000, in the initial year of business. However, if the start-up expenses exceed $50,000, the amount the business can deduct in the initial year of business is reduced. The start-up expenses can still be deducted, but instead of deducting them all in the initial year of business they are deducted over a period of 180 months.