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©2007 Brother2Brother/Sister2Sister, Inc.
A California, USA Non-profit Corporation ~ H.Q.
Monday, October 22, 2007
Brother2Brother & sister2Sister ~ Life Strategies Consulting
Brother2Brother & sister2Sister ~ Life Strategies Consulting
Sunday, October 21, 2007
Strapped Homeowners Gain Tax Relief
Special Web Section Unveiled for Homeowners Who Lose Homes; Foreclosure Tax Relief Available to Many
Special Web Section Unveiled for Homeowners Who Lose Homes; Foreclosure Tax Relief Available to Many
IR-2007-159, Sept. 17, 2007
WASHINGTON — The Internal Revenue Service unveiled a special new section today on IRS.gov for people who have lost their homes due to foreclosure. The IRS also reassured homeowners that, although mortgage workouts and foreclosures can have tax consequences, special relief provisions can often reduce or eliminate the tax bite for financially strapped borrowers who lose their homes.
The new section of IRS.gov includes a variety of information, including a worksheet designed to help borrowers determine whether any of the foreclosure-related relief provisions apply to them. For those taxpayers who find they owe additional tax, it also includes a form they can use to request a payment agreement with the IRS. . In some cases, eligible taxpayers may qualify to settle their tax debt for less than the full amount due using an offer-in-compromise.
The IRS urges struggling homeowners to consider their options carefully before giving up their homes through foreclosure.
Under the tax law, if the debt wiped out through foreclosure exceeds the value of the property, the difference is normally taxable income. But a special rule allows insolvent borrowers to offset that income to the extent their liabilities exceed their assets.
The IRS cautions that under the law, relief may be limited or unavailable in some situations where, for example, part or all of a home was ever used for business or rented out.
Borrowers whose debt is reduced or eliminated receive a year-end statement (Form 1099-C) from their lender. By law, this form must show the amount of debt forgiven and the fair market value of property given up through foreclosure. Though the winning bid at a foreclosure auction is normally a property’s fair market value, it may not necessarily reflect its true value in some cases.
The IRS urges borrowers to check the Form 1099-C carefully. They should notify the lender immediately if any of the information shown on their form is incorrect. Borrowers should pay particular attention to the amount of debt forgiven (Box 2) and the value listed for their home (Box 7).
The IRS also reminds lenders of their obligation to provide accurate information on the Form 1099-C. By law, the lender must send a copy of this form to the IRS. IRS follow-up contacts with taxpayers involved in foreclosure are based largely on the information reported on this form, and whether it conflicts with information provided by the taxpayer on their federal income tax return.
The IRS normally initiates these follow-up contacts by sending the borrower a notice. The tax agency urges borrowers with questions to call the phone number shown on the notice. The IRS also urges borrowers who wind up owing additional tax and are unable to pay it in full to use the installment agreement form, normally included with the notice, to request a payment agreement with the agency.
Related Item:Questions and Answers on Home Foreclosure and Debt Cancellation
Saturday, October 13, 2007
IRS Statute of Limitations
IRS Statute of Limitations: Time Limits to Claim Tax Refunds or to Pay Tax Debts
Plan Your Tax Strategy Around These Time Limits
The IRS has three years to give you a refund, three years to audit your tax return, and ten years to collect any tax due. Together, these laws are called the statute of limitations. They put time limits on various tax-related actions that you and the IRS can take.
You have 3 years to claim a tax refund.
This is measured from the original deadline of the tax return, plus three years. For example, your 2004 tax return was due on April 15th, 2005. 2005 plus 3 is 2008. You have until April 15th, 2008, to file your 2004 tax return and still get a tax refund. File your 2004 return after April 15th, 2008, and your refund "expires." It goes away forever. This is called the statute of limitations for claiming a refund.
The tax code says that you have three years from the original filing deadline to claim a refund. Please file your 2004 tax returns on or before April 15th, 2008, so that your refunds are not lost forever.
The IRS has 3 years to audit your tax return or to assess any additional tax liabilities.
This is measured from the day you actually filed your tax return. If you filed your taxes before the deadline, the time is measured from the April 15th deadline. For example, you filed your 2006 tax return on February 15th, 2007. The 3-year time period for an audit begins ticking from April 16th, 2007, (the filing deadline) and will stop ticking on April 16th, 2010. On April 17th, 2010, the IRS cannot audit your 2006 tax return unless there is a suspicion of tax fraud.
The IRS has 10 years to collect outstanding tax liabilities.
This is measured from the day a tax liability has been finalized. A tax liability can be finalized in a number of ways. It could be a balance due on a tax return, an assessment from an audit, or a proposed assessment that has become final. From that day, the IRS has ten years to collect the full amount, plus any penalties and interest. If the IRS doesn't collect the full amount in the 10-year period, then the remaining balance on the account disappears forever. The statute of limitations on collecting the tax has expired.
Example of the Statute of Limitations
Let's provide an example based on a real-life scenario. Mr. Smith wants to file 6 years of tax returns: 2001 through 2006. All years he has refunds. If he files by April 15th, 2007, Mr. Smith will receive refunds for his 2003, 2004, 2005, and 2006 tax returns. His refunds for 2001 and 2002, however, have expired.
Let's change the example slightly. Mr. Smith wants to file 6 years of tax returns: 2001 through 2006. In 2001 and 2002, he could have received a refund. In 2003, 2004, and 2005, he owes. Mr. Smith cannot apply his 2001 or 2002 refunds as an estimated tax payment towards his 2003 taxes. His refunds have expired. For the 2003 to 2006 tax returns, the IRS has ten years to collect the full tax, plus penalties and interest, from the date Mr. Smith actually files the returns. If Mr. Smith has a refund for 2006, that refund will be used to pay off his tax debts.
Monday, October 8, 2007
Non-Deductible Income, yay!
Tax tips, information and tax return preparation advice
Non-Taxable Income
Don't overpay the IRS by including non-taxable income on your tax return. The following are some of the main non-taxable items of income:
* Life insurance proceeds
* IRA and pension rollovers
* Child support payments
* Inheritances
* Gifts
* Workers comp
* Disability payments if you paid the premiums on the policy. If your employer paid the policy, then the disability payments are taxable. If you paid part of the policy, then part of the disability payments are non-taxable.
* Damages for personal physical injuries. However, damages for emotional distress are taxable except for related medical expenses.
* Health and accident benefits.
* Federal income tax refund. Also your state income tax refund if you took the standard deduction on the related prior year's 1040.
* Many scholarships and fellowships are not taxable.
* Foster care payments (certain restrictions for individuals over age 18 in foster care)
* Gain on the sale of your personal residence is usually nontaxable. The gain might be taxable if you lived in the residence less than two years or if the residence has ever been used as a rental property or home office.
* Roth IRA qualified distributions.
Pay over 50% of parent expenses? Claim them as dependent and yourself as head of household!
Tax tips, information and tax return preparation advice
Seven Common Tax Mistakes
1. Had a Baby
If you had a baby last year, you need to get a Social Security number for your child before you file your tax return. The IRS will not allow you to claim a dependency exemption, child tax credit or Earned Income Credit without a valid Social Security number.
2. Head of Household
Don't file as "Single" if you qualify to file as "Head of Household." You will get a bigger refund if you file as Head of Household. If your ex-spouse claims your child as a dependent on his or her tax return, but the child lives with you, then you probably can still file as Head of Household. Also, if you can claim a parent, grandparent, nephew, niece, brother or sister as a dependent on your tax return, you can probably file as Head of Household.
3. File for an Extension
File an extension if you can't complete your tax return by April 15th. If you don't file an extension, you are charged an additional penalty of 5% a month. Many people who owe tax on April 15th make the big mistake of not filing an extension because they don't have any money to send in with their extension. By sending in an extension even without any payment, you avoid the large 5% a month late-filing penalty and only have to pay the much smaller late-payment penalty.
4. Custodial Parent
A custodial parent who has released the right to claim their child as a dependent to their ex-spouse still has the right to claim head-of-household status, the earned income credit, and dependent care credit. However, if released, the non-custodial parent claims the $1,000 child tax credit along with the dependency exemption.
5. Match Your 1099s
Make sure that your tax return numbers match the 1099s you receive from your broker, employer, or investment company. The IRS receives a copy of all 1099s issued to you so they can match what's on your tax return with what is shown on the 1099s.
6. IRAs
If you have a traditional IRA or SIMPLE IRA, you are required to receive a minimum distribution when you reach age 70 1/2. If your distribution is less than the minimum required distribution, a 50% excise tax may be imposed on the shortfall. Minimum distributions do not apply to Roth IRAs.
7. Early 401(k) or IRA Distribution
If you are younger than age 59 1/2, think twice before you take an early distribution from your 401(k) or IRA account. A 10% early distribution penalty is charged along with federal and state tax on the distribution. A large distribution will bump a taxpayer up to a higher tax bracket, so you also end up paying a higher rate of taxes on your regular income.
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