Budget Hero

September 25, 2012 by · Leave a Comment
Filed under: Budget, Debt 

Think you got what it takes to make a sound Federal budget?  Ladies and gentlemen get your calculators ready – it’s time to play Budget Hero!

 

This game was created and is owned by American Public Media and appears here with their permission.

http://budgethero.publicradio.org/widget/widget.php?refid=apm

I Lost My Job and Can’t Pay the IRS

April 10, 2012 by · Leave a Comment
Filed under: Debt, Debt Resolution, IRS Debts, Unemployment 
going out of business

Photo by Timetrax on flickr.com

I write a lot about what to do if you can’t pay the IRS, but this is new stuff just for 2011 taxes.   If you’re out of work, or if you’re self-employed and your income is lower than last year, you may be able to apply for an extension of time to pay your 2011 income tax–so you don’t get hit with late payment penalties.

Who can qualify?
  • First, your adjusted gross income (that’s line 38 on form 1040) must be less than $100,000 (or $200,000 if you’re married filing jointly.)
  • Second, you need to owe the IRS less than $50,000.
What’s considered a good reason for filing?
  • Losing your job, for one.  If you were unemployed for at least 30 consecutive days in 2011 or the first part of 2012, then you can apply for relief.
  • Or, if you’re self employed, if your business income is 25% or more less than what it was in 2010, then you also can qualify.
What other things do I need to know?
  • The relief is only good for your 2011 taxes.
  • It only helps with the failure to pay penalty, you’ll still have to pay the interest on your late payment (about a 3% annual interest rate.)  You’ll also have to pay any other penalties that you might owe.
  • If you don’t pay the amount of tax you owe in full by October 15, 2012–then you’ll still wind up paying the penalty and it will be back-dated to April 15th.
  • If you apply for the late payment relief, you must have your tax return or extension filed on time.
So if I want to apply, how do I go about it?
The form you need is called:  Application for Extension of Time for Payment of Income Tax for 2011 Due to Undue Hardship.   That’s a mouthful isn’t it?  Fortunately, it’s easier to fill out than it is to say.  The form number is called 1127-A.  Here’s a link to the IRS website so you can download it yourself:

http://www.irs.gov/pub/irs-pdf/f1127a.pdf

Besides stuff like your name and address, you only need to know your adjusted gross income and the amount of tax you owe.  You can’t e-file the form with your tax return, you have to print it and mail it in.  It doesn’t go to your regular tax office–it’s either going to be mailed to Huntsville, New York or Fresno, California.  Look at the instructions on page 3 of the form to learn where you should mail your form.

Why would I want to do this?
Basically, if you owe taxes and can’t pay, the IRS charges ½ of one percent on the balance due each month that you haven’t paid.  So, after 5 months–that’s a 2.5% penalty.   So if you owe $5,000 that would cost you an extra $125.  That might not seem like that much but why pay the IRS more than you have to?  If you think you can come up with the money within 5 months–why not take advantage of the break?
One last piece of advice
I wind up dealing with lots of people who just don’t bother to file their tax returns because they owe.  That’s a really bad decision.  You see, the penalty for paying late is only ½ of one percent per month, but the penalty for not filing is 5% per month.  So if you take that $5,000 I mentioned earlier and you didn’t file your return because you knew you owed–well the penalty for that would be $1,250 if you waited until October to file.  Now that’s a pretty serious chunk of change so make sure you file your return–or at least file an extension, by April 17th.   You really don’t want to give the IRS any more money that you have to, do you?

What You Need to Know If Your Mortgage Debt Is Forgiven

November 22, 2011 by · 4 Comments
Filed under: Debt 
Sign Of The Times - Foreclosure

Photo by Jeff Turner on Flickr.com

It’s happening all over the place. Homes are being foreclosed on and banks are forgiving loans. Having your loan forgiven can be a lifesaver, but being taxed on that loan forgiveness can be devastating. There are remedies to help ease the tax burden, but make sure you know the facts so that it doesn’t come back to bite you.

If your debt has been cancelled by the bank, you should receive a document called Form 1099C, Cancellation of Debt. This form also goes to the IRS. It must show the amount of debt forgiven and the fair market value of the property that was foreclosed. Once you get a 1099C, make sure that you check it over carefully. If anything is wrong on that form, you need to go back to the bank to have them change it. The two important numbers you’re looking at are the debt forgiven amount (that’s box 2), and the fair market value of the property at the time of foreclosure (box 7). These figures will be extremely important to you, especially if you have credit card debt or college loan money tied up in your mortgage.

The Mortgage Forgiveness Act of 2007 allows you to exclude up to $2 million of debt forgiven on your principal residence. The limit is only $1 million for a married person filing a separate return. You don’t have to be foreclosed on to exclude debt—you may also exclude debt reduced through a mortgage restructuring. This is really important for people doing a workout with their bank.

To qualify for mortgage forgiveness, the debt had to be used to buy, build, or substantially improve your main home and the mortgage had to be secured by the home. For example: let’s say you bought your home for $250,000 back in 2003. You put $50,000 down and financed the other $200,000. The value of your home was going up, and in 2006 when the balance of your loan was $180,000 you refinanced and took out another $50,000 to pay off credit cards. Times have changed and now you have outstanding debt on your home of $230,000 but the value has dropped to $200,000. The bank forecloses and forgives your debt of $230,000. $180,000 can be written off as mortgage forgiveness because that’s the value of what you used to buy the home, but the remainder will still be taxable to you unless you qualify under some different category to abate the taxes. See where the problem is here? If the home is worth $200,000 when your debt is written off, the whole $180,000 that would have been forgiven is already covered by the value of the home, so really the only debt being written off is the other $30,000 remaining after the fair market value of the home is written off. Because that’s not part of the purchasing debt, that $30,000 is fully taxable, unless you can use of the other exclusions.

If you qualify to exclude your mortgage forgiveness from tax, you’ll need to complete Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (what a mouthful) and attach it to your federal tax return. Here’s a link to the form on the IRS website: http://www.irs.gov/pub/irs-pdf/f982.pdf. If 100% of your debt forgiven was for a mortgage used to buy, build or improve, it’s not that hard to do the forms. If you’ve got any other debt included with your mortgage forgiveness, don’t go it alone.

Debt that was forgiven on credit cards, second homes, rental property, car loans, or business property does not qualify for the principal residence exclusion. The debt might still qualify for a tax exclusion based on another category, like insolvency. There are instructions about claiming the insolvency exclusion on the IRS website, but for that you might want to get professional help with that. You can’t just go, “Oh, I couldn’t pay so I was insolvent.” The paperwork is a little more complicated than that and it tends to get looked at pretty carefully by the IRS. To be honest, I’ve had to help a few people who tried filing 982 forms on their own and wound up getting IRS letters. Personally, I think it’s cheaper to get help from the start and do it right than have to pay someone like me later to straighten out a mess with the IRS.

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