Author: Jan Roberg

Posted on by Jan Roberg

Charitable Donations: How Much Should You Tithe? Why Do It?

collection plate

Photo by rubber bullets on flickr.com

This is one of the most difficult questions I get asked every year. I think most people have heard the 10% rule (donate 10% of your income to your church), but what they’re asking me is, “10% of gross, 10% of net after taxes, or 10% of net after my deductions?” And here’s my classic cop-out answer: “You should ask your religious leader.” I always thought that was safe, and different churches have different opinions. (Although I’ve never heard any religious organization say 10% after deductions – just to be clear.) I always thought that referring it back to the church was a good answer until one of my clients came back at me with, “I talked to my minister first and he told me to ask you.”

For a moment I was terrified. If I got this answer wrong, it’s not like a tax return mistake, it’s messing with God. Screw it up and you go to hell, go directly to hell, do not pass go, do not collect $200. And the reason it was so scary was because for this particular person, I felt that she could not even afford 10% of her net income to go to charity, much less 10% of her gross. (Hindsight being 20/20, I think her minister was pretty much thinking the same thing and didn’t want to make a rule that would harm his congregant.) If we used the 10% after deductions rule then nothing would be going to charity and that wasn’t an acceptable answer for my client. So we sat down and worked out a budget for her church donations. I figured that God wanted her to have a roof over her head and food on the table and we went from there. Her tithe didn’t work out to 10% of her income, but she was happy, I was happy, her minister was happy, and I didn’t get struck by lightning—a good sign.

So, how much should you tithe? If your church doesn’t have definitive rules on tithing, I think 10% of your take home pay is the best answer: ten percent into savings, ten percent into charity and the rest to handle your day to day living expenses. Now, if putting 10% into charity means you can’t put food on the table and maintain a roof over your head then we need to get you to a better financial place first. Donate what you can.

What if I don’t go to church? Even if you’re not donating to a religious institution, the idea of 10% going to charity is still a healthy one. There are thousands of worthwhile charitable organizations that need help. And, for many of us, we have friends or family members that need our charity just as much as the United Way or the ASPCA does. Remember, true charity isn’t always a “tax deductible” event.

If I tithe, what’s in it for me? For some people, charitable donations are tax deductible. That’s the obvious answer from a tax blog, right? But more importantly, I find that persons who regularly make charitable donations tend to weather the difficult economic times better. You could argue that’s because persons of faith have their faith to help them through hard times, and there’s certainly a lot of truth to that. But I also find that even people not associated with religious institutions who donate generously seem to fare better in difficult financial times than people who don’t contribute.

I heard someone suggest that it’s the discipline required to donate part of your income to charity that gives people the discipline to handle financial setbacks. I can’t say for sure. I do know that I prepare a lot of tax returns. I prepare a lot of tax returns for people going through bankruptcy and/or foreclosure. What I don’t see on those tax returns is charitable giving. Now you might say, “But, they’re going through bankruptcy, they have no money!” True, but the charitable giving isn’t there in the years before the bankruptcy either.

It’s only anecdotal evidence; I really don’t have hard numbers. I’ve talked with other tax people who’ve noticed the same thing. Perhaps the old adage is true, when you donate to charity, the person you’re helping the most may just be yourself.

Posted on by Jan Roberg

Extreme Makeover Home Edition TV Show—Tax Issues

Ever watch those reality TV shows and wonder how the winners pay their taxes? You’ve probably heard about Richard Hatch, the “Survivor” winner who wound up going to jail for not paying taxes on his winnings from that show. And what about the “Extreme Makeover Home Edition” people? They basically live in shacks that get remade into mansions. Those people are poor and they’re not getting cash money, so how do they pay the taxes on their new homes? I’ve got some answers for you.

Generally, if you win money or prizes on a game show, the money or the cash value of the prize is taxable to you on your personal income tax return. That’s why if you’re ever on a game show and your choice is the prize or the cash, my advice is to take the cash so that you can pay the tax.

Extreme Makeover Home Edition is a little different. The winners usually don’t get cash and the value of the makeover can be worth over a million dollars, so how do those people deal with the taxes? The answer: they don’t. You see, according to IRS regulations, if a tenant makes improvements to a landlord’s property, the landlord is not required to pay tax on the property improvement made by the tenant. When Extreme Makeover comes knocking at the door, they sign a lease that says they’re renting the property from the homeowner. That makes those crazy improvements they do tax free!

There’s also a whole lot of things that go on during that week that you don’t get to see. For example: when you watch the show, you see them putting up one home. In reality, they’re shooting two shows at once and Ty Pennington and the other stars are racing back and forth between two home building sites. Putting up one home in a week would make me dizzy, I can’t imagine working on two at a time.

Another issue that they have to settle before a family is selected is the mortgage. ABC actually works with the mortgage holders of the properties to make sure they won’t foreclose on the winners after the project is done. Sometimes on the show you’ll see a scene where the mortgage is forgiven by the bank. That too would create a tax situation for the winner, but once again, Extreme Home Makeover has done their tax homework. When a mortgage debt is for the purchase or improvement of a taxpayer’s main home, then when the debt is forgiven. That debt forgiveness is excluded from the income at tax time, so the Extreme Makeover winners don’t pay tax on their debt forgiveness either!

Another big win that you see a lot on Extreme Makeover is some local college will grant scholarships to the kids. Once again, college scholarships aren’t taxable, ka-ching! I love this show.

Now sometimes you’ll see a family get a car or something else—that is still taxable and when that happens, the winner will get a 1099MISC for the value of the prize.

When it comes to the best bang for the buck, Extreme Makeover Home Edition gets the prize for the best tax-advantaged reality show on TV.

Posted on by Jan Roberg

Tiny Business Owners: When You Don’t Want to Reduce Your Income for Tax Purposes

Small restaurant in Forks

Photo by Derrick Coetzee on flickr.com

I know what you’re thinking: “Come again? You must be out of your head! Don’t I always want to reduce my income for tax purposes?” Sometimes, the answer is no. Actually, I got the idea for this post from Howard, one of my readers with an accounting background and an owner of a struggling restaurant.

I’m walking on a tight rope here so I want to make sure that I explain this carefully. Under tax law, a small business owner is required to report all of his income and expenses accurately. I’m always telling people “don’t make stuff up” – that’s my rule and I stand by it. That said, there’s some leeway, like prepaying expenses at the end of the year to reduce your business income and stuff like that.

Where I’m going with this is there are some people who don’t want to reduce their business income for the tax year. One category is people who are applying for a home loan—you want your net income to be as high as possible, even if you’re paying self-employment taxes because the bank will be looking at your net income. The other category of folks who might not want to reduce their business income is people who may qualify for an Earned Income Credit (EIC).

Since leaving the big box tax company, I haven’t filed a lot of EIC returns; most of my clients are small businesses owners and have incomes that are too high to qualify. But last year, I had 5 EIC returns for people who had never even heard of EIC before, basically small businesses that had hit a rough spot with this economy. (I do lots of returns for people who don’t own businesses too. But I’m on a business roll right now.)

So here’s the thing: as a small business owner, you’re taxed 13.3% for your self-employment tax for 2011. If you make a net profit of $10,000 your self-employment tax is about $1,330. (Not exactly, it’s a funky equation, but that’s pretty close.) If you’re single with no children, the Earned Income Credit would be about $278, so it would make sense for you to lower your net income if you can so that you reduced the self-employment tax. But, let’s say you’re filing as head of household with 2 children – in that case your Earned Income Credit would be around $4,010 so reducing your net might not be such a good idea.

Bottom line: the tax strategies for a business owner who is a parent may be different than the strategies of a business owner with no children.

The IRS website has an Earned Income Tax Credit Calculator to help you determine how much of an Earned Income Credit you can receive if you qualify for one. Here’s the website: http://apps.irs.gov/app/eitc2010/SetLanguage.do?lang=en.

Remember, that’s just the EIC and it is an estimate. Remember that for your-self employment income, there’s also self-employment tax – the quick and dirty calculation for that is 13.3%. It will help you figure out where you stand with the EIC compared to self-employment taxes.

If you’re married and your spouse has income, that income will be included in the overall calculations, so EIC may not be a factor for you.

There are so many things to think about when you own your own business. It’s a good idea to get some professional help at least once every three years to make sure you’re on track and getting every deduction and tax credit you deserve. If you have made mistakes in the past, a professional can amend your prior year returns and get you refunds for what you’ve missed as long as you’re within that three year time limit.

Posted on by Jan Roberg

Sub-S Corp Year End Tax Tips

Tax tips for Sub-chapter S Corporations

        As the year comes to a close, make sure you do everything you can to reduce your tax liability.

 

 

Updated for 2016

 

You read a lot of news stories about year-end tax tips, but you don’t see a lot of things specifically targeted at Sub-S Corporations, and there’s nothing out there for the single owner S Corporation. It’s kind of sad because most people with Sub-S Corps are set up that way for the tax advantage.  If you own a Sub-Chapter S Corporation, then you need to make sure that you maximize your deductions. These tips are especially for you:

 

First, and most importantly, if you’ve got a profit this year, you want to make sure that you are paying yourself some type of payroll. This is one of the most common mistakes that S Corps make. The point of having an S Corp is to protect some of your income from self employment taxes. (Notice I said some, you can’t protect yourself from all self employment tax.)  S-Corporaton owners need to pay themselves a salary. In the early years of a business, there’s often a loss and the salary isn’t important, but once the business is in the profit side, the owner should be paying a wage that is commensurate with what he or she’d be earning if he worked the same job for someone else. If you don’t do this, the IRS can come back and assess self-employment tax on 100% of your S corp profit. That would completely defeat the whole purpose of being an S Corp, so that’s the first thing you want to handle.

 

Reimburse yourself for your employee expenses: Write yourself an expense report and have the S Corp write you a check. For example: let’s say you took a business trip for a convention and your travel expenses cost $1000. You paid it out of your own pocket because it was easier at the time and you just figured that you’d write it off on your taxes later.  But that’s a stinky idea.  Here’s why:

 

Even though you are the owner of the business, you are also an employee.  As an employee of the S corp, you would put the $1000 travel cost on your schedule A as an employee business expense.  When you do it that way, the expense would be subject to the 2% limitation rules.   Meaning, you can only deduct expenses that are over 2% of your adjusted gross income.  The higher your income, the smaller the deduction you get to claim.   If you pay Alternative Minimum Tax, or don’t itemize your deductions, you could even get a zero tax benefit from putting it on your schedule A.  So putting the expense on your schedule A gives you a much smaller tax benefit than if it’s on your S Corp return.

 

When you do an expense report, and reimburse yourself through the business you get  100% of the allowable business deduction.  Isn’t that much better?

 

Next up:  Pay your health insurance through your S Corp: This is a little convoluted, but stick with me.   If you claim this deduction, you want to do it right.  As an employee of your S Corp, you can’t claim the self-employed health insurance deduction like you could as a sole proprietor. Your health insurance would go on your schedule A subject to a 10% limitation before anything could be deducted (for most people that’s a zero deduction.)  We don’t like zero deductions!  So you have to do the S-Corp health insurance dance.  It goes like this:

 

Your S Corp pays your health insurance, then it comes to you as a taxable fringe benefit.  When you do it this way you get to deduct the cost of your health insurance on page 1 of your tax return (just like a sole proprietor)—a much better place to put a deduction.  You do not pay FICA on your health insurance.

 

So let’s say your wages from your S corp are $10,000 and your health insurance is $5,000.  In box 1 of your W2, it would say wages $15,000.  In boxes 3 and 5 – the Social security and medicare wages, it would say $10,000.   You would then deduct the $5,000 that you paid in health insurance under the self employed health insurance line.  (Line 29 in the 2015 return.)    Yes, I realize that this sounds like a cockamamie way to do the accounting for your health insurance–but those are the IRS rules.  ‘Nuf said, right?  And while I realize that this sounds crazy, that’s really how you do it.

 

Another expense you don’t want to miss out on is to reimburse yourself for your home office deduction: It’s hard to claim a home office deduction on a Sub-S corporation. Like other employee expenses, it would go on your Schedule A and be subject to the 2% limitation rules like any other employee business expense. Many accountants won’t even touch a home office for a Sub-S Corporation.

 

Some people try to charge rent to their S Corps for their home office, but that’s just moving your income from one taxable entity to another so you don’t really save anything on you taxes that way either..

 

What you want to do is reimburse yourself for your home office deduction in a fully accountable plan. That’s a phrase that you want to remember: fully accountable plan. Prepare a form 8829 Home Office form like you were doing it for a sole proprietorship and use that report to determine how much you should reimburse yourself for your home office. Remember, it’s a reimbursement, not a rent payment. It reduces taxable income to the company, but it is not taxable to you because you have “accounted” for the expenses. For more information about home office deductions, you might want to read this post: How to Boost Your Home Office Deduction

 

If you’re interest in more year end tax tips, you might also want to check out: Year End Tax Tips for Tiny Business Owners.

Posted on by Jan Roberg

Year End Tax Tips for Tiny Business Owners

 

Taxes for small business owners

Planning ahead on your taxes could save you money!

 

Updated for 2016!

 

Tiny business owners, you know who you are: you’re a single member LLC or sole proprietor, or maybe you’re in business with your spouse. You might even have an employee or two, but that’s about it. When Congress passes laws to help “small business” they don’t mean us. This post is for you. If you have a Sub-chapter S corporation, I’ve got some different tips here:  Tax Tips for Sub-chapter S Corporations

 

Number 1: If you’re going to be in the red for this year, you don’t really need to worry about reducing your business tax, right? Your negative business income will help offset your other income (if you’re lucky enough to have some). You can devote your energy to being profitable next year.

 

Number 2: If your business is in the black, congratulations! You’re going to want to look at cash flow and make sure you’re got enough cash to pay your upcoming expenses (like payroll and payroll tax if you’ve got it), but let’s look at some ways to reduce your excess income before the year is out.

 

Hire your kids: If you’ve got kids under the age of 18, you can hire then without having to pay FICA.  It used to be if you had an LLC, you paid FICA for your kids but that changed in 2011 so even if you have an LLC, you don’t pay FICA on your children’s wages.     There are rules that have to be followed, but if you could use a little help at work this time of year you’d at least be keeping the money in the family. For more information check this: Hire Your Kids

 

Pre-pay business expenses: Most tiny business owners use something called “cash basis accounting”, basically, you’re taxed on what comes in versus what goes out. If you are cash heavy, you can pre-pay some of your business expenses for up to twelve months. For example: I lease my office space, I’ve got a one year contract so I know that I’m going to have that monthly expense for the rest of the year. If I were cash heavy (in my dreams) I could prepay my rent for the next year and write it off on this year’s taxes. But you see how you can play with that? While I won’t be paying a full year of rent in advance, I did pay a few January bills early.

 

Delay invoices: Remember, this only works if you’re cash flush. Let’s say you did a job and a client owes you $1000 and you normally would send out the bill with a due date of December 30th. Change to due date to January 15th—you’re pushing that income ahead to next year. Besides, your client might just appreciate the break at Christmastime. I set up a billing schedule for a client that didn’t start until January and I used “I thought you could use a little Christmas break.” She was thrilled and I delayed the income—talk about a perfect win/win situation.

 

Credit card purchases:     According to IRS rules, if you buy something with a credit card, you’ve bought it now. So, let’s say you’re a little cash poor right now but you’ll have the revenues next month to cover your expenses. Pay expenses with your credit card and it will count as having been paid when charged.  I always like to be cautious about credit card spending–hate those bills, but it’s a good solution for some businesses.

 

This one I don’t like to say, but buy equipment: If you need it. I almost hate to list this as advice because it’s the standard that everybody says every year. One of my clients fired his old accountant for saying it. Like he said, “I know what I do need and don’t need to run my business and I don’t need any more equipment. What other ideas you got?”  Here’s my advice, “Don’t buy crap you don’t need.” If you do need equipment, and you’re profit heavy, it’s better to buy in December than in January. But buy what makes sense for the business.

 

Get your retirement plan in place: If you’re just investing in an IRA, you don’t need to worry about that yet, you’ve got until April to do that. If you’ve been wanting to set up a SEP or a 401(k), you need to get that done by December 31st. Contact your financial advisor about setting up your business retirement plan.

 

Last, because this isn’t really business: charitable contributions. If you’re a sole proprietor, your charitable contributions do not count as business expenses. So if you give money to the Salvation Army, that’s a personal deduction, not a business deduction. Every year, I see a lot of people trying to claim their charitable contributions as business expenses and it won’t fly with the IRS. Even if you pay a charity from your business bank account, it’s not allowed as a business expense. Charitable contributions won’t help reduce your self-employment taxes. Please give to charities and give generously, but know that it’s a personal deduction, not a business one.

Posted on by Jan Roberg

Tax Tips for Daycare Providers

jungle gym dialogues

Photo by Angela Vincent on flickr.com

First things first, let’s tackle the big “problem” many daycare providers have – licensing. The IRS demands that you report all of your daycare income, but if you’re not licensed, you don’t qualify to claim any of the deductions. Now the whole licensing thing varies by state. Here in Missouri, you do not have to have a daycare license if you care for four or fewer children who are not related to you. If you’re exempt from licensing requirements for your state, then you’re qualified to claim all of the federal tax deductions relating to your daycare business. Different states have different rules. Just across the river in Illinois, the licensing requirements are much stricter. Be sure to look up the rules for your state before you claim daycare deductions.

Your daycare income will go on a form called Schedule C which will be part of your regular 1040 tax return. You are required to pay self-employment tax on your daycare income; that will be 13.3% for 2011, generally it’s 15.3%. Self employment tax is in addition to your regular income tax, so you can see why claiming your expense deductions can come in kind of handy.
The first, and probably the biggest, daycare deduction is for the business use of your home. That’s going to go on a Form 8829 and it’s going to be linked to your Schedule C. You won’t be able to deduct all of your rent, utilities, and expenses, but you’ll be able to deduct a portion of them as a percentage of how much of the home the kids have access to and how long you’re open. Kids put a lot of wear and tear on your home so definitely take advantage of this deduction.

Another big expense for many daycares is food. You can deduct as a business expense 100% of the cost of the actual food the kids you care for eat. If you’re doing your taxes yourself when you’re looking at the actual Schedule C form, there’s a section for “meals and entertainment” –you don’t want to use that line. That only gets counted as a 50% expense – that’s for sales people taking clients out to lunch and stuff like that. You’re going to want to put the food for kids on a separate line in the “other” expenses category. Call it “food for kids”. (Okay, that seems pretty “duh” but I didn’t have a better way to say it.)

If you get reimbursements under the Child and Adult Food Care Program of the Department of Agriculture, that’s not taxable unless you get more money than you actually pay out for food for the kids. Usually, you’ll get a 1099 showing you received a payment. If that’s the case, you must report it as income on your Schedule C, but then you’ll deduct the cost of food in the expense category. (If you get a 1099 and don’t show it as income, you’ll get a nasty IRS letter—that’s why you want to show it on the Schedule C even though it’s not supposed to be taxable.)
If you’re deducting food, keep separate receipts for your daycare food from your family food. (Right, I know, that’s not easy.) But remember, you can’t take a deduction for the food you feed to your own family. Now let’s get real: you just shop and buy groceries for your daycare kids and your family in one fell swoop don’t you? (Okay, that’s what I’d do, and I’m one of those anal retentive accountant types!)

Here’s how you solve that problem. The IRS has official “snack and meal rates”. Granted, they haven’t been updated since June of 2010 but I’ll work with what the IRS gives me. The rates are as follows:

  • Breakfast: $1.19
  • Lunch: $2.21
  • Dinner: $2.21
  • Snack: $0.66

Alaska and Hawaii have different rates:

  • Alaska: $1.89, $3.59, $3.59, $1.07
  • Hawaii: $1.38, $2.59, $2.59, $0.77

So let’s say you take care of Oliver 5 days a week. His parents take care of breakfast and dinner, but you do provide lunch and a snack every day. Oliver stayed home two weeks over Christmas and one week over Easter, other than that you’ve had him all the other days. You take $2.21 for lunch and add $0.66 for lunch and that makes $2.87. That’s what you spend on Oliver’s food on a daily basis. You multiply that by 5 days a week and get $14.35. You multiply that by 49 weeks (there’s 52 weeks in a year and you didn’t have him for 3 weeks) and you get $703 spent on Oliver’s food that you can deduct from your income.

Granted, you probably spend more than that on your daycare kids, but at least this gives you something to work with, especially if you haven’t been keeping good records.

Don’t forget the other deductible things either: money you spend on toys and games, and extra costs of laundry and cleaning supplies. If you take the kids on field trips, be sure to keep track of your mileage and the cost of admission to events. And remember that if you’re reading magazines to help you with taking care of the kids, those can be a business expense too: things like Family Fun Magazine that give you tips on things to do with kids, that’s work reading.

Taking care of other people’s children is hard work. You deserve every penny you earn. My job is to help you keep it.

Posted on by Jan Roberg

Nanny Tax: What to Do About Your Household Employees

Nanny phoro

You hear about it every election year, some woman is running for office and she gets outed for not paying her “nanny tax.” (I’m sure that there are men guilty of this crime as well, but it seems that women candidates are the ones who get caught.) If you have household employees, such as a nanny, private nurse, cleaning person, health aide or private gardener, you may be subject to paying their payroll taxes.

How do I know I have an employee? Good question – that’s how people get in trouble. Here’s an example: I hire Ernie the lawn guy. He uses his own equipment. He usually comes on Thursdays, but last week he thought my grass wasn’t long enough so he didn’t cut it. Ernie basically has control over what he does. Ernie has his own lawn care company – he’s self employed. On the other hand, I hired Dawn to help take care of my mom. Dawn only worked a few hours a week, but Dawn was supposed to come at a certain time, leave at a certain time, we purchased any supplies she needed, and she basically did what she was instructed to do. Dawn was really a household employee.

If you hire someone to care for your children in your home – that’s pretty much a household employee because you’re going to have some very specific rules about how your children are cared for. On the other hand, if you take your children to someone else’s home for child care, even though you may have very specific rules about how your child is cared for, it’s still not a household employee because your child is being cared for outside of the home. Is this getting any easier? I know it’s kind of fuzzy but that’s pretty much how it goes.

If you have a household employee, you need to have them do employee paperwork: They need to fill out an I-9 form. Here’s the link to that: http://www.uscis.gov/files/form/i-9.pdf. The page that needs to be filled out is on page 4. For most people, you’re going to want to check their driver’s license and social security card to make sure they are allowed to work in the US. Page 5 gives you lists of other acceptable documents should you need them.

The other document that you’re going to want your employee to complete is a W4 if you’ll be withholding income tax. http://www.irs.gov/pub/irs-pdf/fw4.pdf Most household employers do not withhold state or federal income tax but some do. You will be withholding social security and medicare taxes from every paycheck though.

So now that you’ve determined that you’ve got a household employee and you’re withholding social security and medicare taxes, how do you pay them? Household employee withholding is a little easier than if you own a business and have to pay withholding taxes. You’re actually going to pay the taxes with your own personal 1040 return on a form called Schedule H. http://www.irs.gov/pub/irs-pdf/f1040sh.pdf

Before you panic about having to do withholding and stuff, make sure that you’ve paid enough to be required to do withholding. If you pay any one employee wages of $1700 or more, then do the Schedule H. If you withheld federal income tax, that will be included on the Schedule H as well. Also, if you pay total cash wages of $1000 or more in any calendar quarter, then you’ll also have to do a schedule H. For example: you hired two workers around Christmas and paid them each $600 – then you’ve got to do the Schedule H, even though you haven’t paid either of them over the $1700 limit. There are some exceptions for people under 18, hiring your kids, or hiring your parents. If you think you have an exception to paying the nanny tax, or want more information, you can read more about it in IRS publication 926. http://www.irs.gov/pub/irs-pdf/p926.pdf

You will need to supply your household employee with a W2, and the appropriate copies will need to be sent to the Social Security Administration. You can get free forms from the IRS. You have a deadline of January 31st for getting the W2 to your employee and February 29th for the Social Security Administration. You must use the real form – it’s red. You can’t download it off the internet. Here are W2 filing instructions from the Social Security Administration: http://www.socialsecurity.gov/employer/index.htm

Now here’s the big commercial plug—doing all these forms can be a real pain in the behind for a normal person. For a tax geek like me, it’s kind of fun. (I guess that means I’m not normal?) But at Roberg Tax Solutions we can get all of your household employee tax paperwork taken care of and done right, so you don’t have to worry about it.

Posted on by Jan Roberg

The Thanksgiving Post

May you have a very Happy Thanksgiving.

May you have a very Happy Thanksgiving.

 

I know, this is supposed to be the tax column: taxes, taxes, taxes. Sorry, not today. I’m taking the day off. I’m watching the Macy’s Thanksgiving Day Parade on television, eating far too much turkey and stuffing, and visiting with the relatives.

 

 

On Friday I’ll probably spend too much money at the mall. Mind you, I hate shopping on Black Friday, but certainly one of said relatives will talk me into going. That is, of course, unless one or more of the younger said relatives talks me into the latest kid movie.  The little ones can pretty much talk me into anything which is really as it should be right?

 

Don’t worry about me going all happy and smiley on you. I’ll be back to my old “death, divorce, bankruptcy, foreclosures, and IRS problems” next week.

 

For now though, I’m just being grateful for the many blessings of life.  Happy Thanksgiving.

 

Posted on by Jan Roberg

What You Need to Know If Your Mortgage Debt Is Forgiven

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.

Posted on by Jan Roberg

What You Need to Know About the 2011 Home Energy Tax Credit

Day Nine, Insulation and New WIndows Ready to Install

Photo by Gary J. Wood on Flickr.com

They’ve flip-flopped on the issue more often than a presidential candidate in a primary debate. If you’re a little confused about what you can or can’t deduct, you’re not alone. Hopefully this will help.

First, in order to claim this credit, any improvements must be made to an existing home and it must be your main residence. This means that landlords and new home builders are out of luck on this one.

The credit is smaller than before. If you did improvements in 2011, the credit is 10% of the cost of the improvements and it caps at $500. Some credits, like windows, are capped at an even lower amount.

There’s also a lifetime limit on the credit so if you received an energy tax credit anytime between 2006 through 2010 then your 2011 energy tax credit will be reduced by that much.

Excuse me for a moment while I rant and rave. The IRS says on its website that you should keep your tax records for 3 years. But for this case, the IRS is expecting you to go back through 5 years worth of information to see if you claimed a credit back in 2006? This is crazy. Nobody’s tax software has carried forward that information because it was never a carry forward issue until now. This tax credit is kind of a “Thanks, but no thanks,” kind of deal. Gee it’s nice that they extended it and all, but it’s really going to be a pain in the *#$. I’m expecting a lot of IRS “gotchas” with this credit and I think “gotchas” are morally wrong.

Okay, back to business now. The bottom line is, if you’ve claimed $500 worth of energy tax credits at any time over the past 5 years, don’t try to claim any more. Make sure you check (because the IRS most certainly will). The form you’re dealing with is Form 5695. I don’t have a link to the 2011 form yet.

Also, if you’ve zeroed out your taxable income, this credit is “non-refundable” which means it’s only a credit against your tax liability, if you owe no tax, this credit won’t help you.

Another thing is the whole “Energy Star” issue. You’ll want to make sure that the improvements that you make on your home qualify under the “Energy Star” program. Here’s a link to their website: http://www.energystar.gov/index.cfm?c=tax_credits.tx_index. But it’s important to remember that just because you buy something that has an Energy Start label doesn’t mean that you’ll qualify for a tax credit. I had a couple of clients last year who brought in receipts and Energy Star labels but it was for things that didn’t qualify for the tax credit.

If you need to install insulation or storm windows, go ahead and do the work. Do what’s right for your home and family. If you manage to qualify for a tax credit for it, great, but don’t count on receiving that tax credit as you calculate your expense of the project. There are a lot of land mines you have to step over to get to it.