Simply Junior

With foreclosure rates at an all time high, new tax law was passed at the end of 2007 to help homeowners avoid unmanageable income tax debt due to income created from a foreclosure. The new law also covers mortgage renegotiations and other real estate related benefits.

How is income created from a foreclosure? Here is a common scenario:

A lender forecloses on a property and then sells the property for less than the outstanding mortgage balance. There still remains an unpaid mortgage debt, which is the difference between the outstanding mortgage balance and the sales price. What usually happens next is the lender forgives the unpaid mortgage balance.

Before the new tax law, the unpaid mortgage balance was considered taxable income leaving the homeowner with an income tax bill.

After the new tax law, the unpaid mortgage balance is excluded from taxable income up to $2 million.

What is a mortgage renegotiation? Before starting the foreclosure process, a lender typically performs a cost-benefit analysis of foreclosing on a property. The result may be that the foreclosure is not in the lender’s best interest, which isn’t uncommon since the typical foreclosure nets the lender only about 60 cents on the dollar. In this case, the lender may renegotiate the terms of the mortgage to get to a lower monthly payment for the homeowner.

For example, one renegotiation workout plan organized by the Bush Administration and a group of lenders would bypass adjustable rate resets for up to five years. This type of renegotiation would typically result in forgiveness of indebtedness income creating taxable income to the homeowner if it were not for the new law.

What type of debt qualifies for the exclusion? The new law applies to debt incurred for the acquisition, construction or substantial improvement of the principal residence of the taxpayer and is secured by the residence. It also includes refinancing of such debt to the extent that refinancing does not exceed the amount of the original indebtedness.

What do homeowners need to watch out for? Homeowners who did “cash-out” refinancing and did not put the funds back into the home but, instead, used the funds to pay off credit card debt, tuition, medical expenses, or other expenditures. The “cash-out” amount is indebtedness income and fully taxable unless other exceptions are met.

What qualifies as a principal residence? A principal residence is the one in which the taxpayer lives most of the time. However, the determination of a taxpayer’s principal residence is based on “all the facts and circumstances.” The definition is the same as the home sale gain exclusion.

This rules out vacation homes, second residences and rental properties, even if the properties were purchased with equity from the taxpayer’s principal residence.

When is the new law effective? This special relief is available for three years beginning January 1, 2007, and ending December 31, 2009.

What other real estate related benefits are included in the new tax law?

Mortgage Insurance Deduction. The new law extends the mortgage insurance deduction to amounts paid or accrued after December 31, 2007, but only with respect to contracts entered into after December 31, 2006, or prior to January 1, 2011.

Survivor’s Home Sale Exclusion The new law extends the time in which a surviving spouse may use the married filing joint $500,000 home sale gain exclusion before being treated as a single individual entitled only to a $250,000 exclusion. Before the new tax law, a surviving spouse was could use the $500,000 exclusion only to the extent he or she could file a joint return with the deceased spouse’s estate, which is only in the tax year the spouse dies.

Starting January 1, 2008, the surviving spouse can use the $500,000 gain exclusion up to two years following the date of death of the spouse.

What’s the catch? As you have read, this new tax law contains major tax reductions, which are offset by several tax increases included in the new law. These increases include:

An increase in the failure to file penalty for partnerships from $50 to $85 per partner per month, up to 12 months

A new failure to file penalty for S corporations of $85 per S shareholder per month, up to 12 months

Increases in corporate estimated tax payments for corporations with $1 billion-plus assets, by 1.5 percent to 117.25 percent for payments due in July, August and September 2012.

Some may have heard of a Health Spending Account or HSA, but few know the absolute benefits to a small business owner.

When you leave employment to venture into your own business, you generally leave behind your ‘benefits’ package and suddenly find yourself with no health-care coverage. There is however, a very simple, very cost-effective and tax-effective solution-the HSA.

Most people are familiar with or have had ‘Group Insurance’ and hence are aware how the programs work. They are however Insurance programs and have limitations, restrictions and high risk of fee increases each year. A ‘typical’ group insurance program can cost a business owner $300-$400 per month for family coverage, and this coverage would have significantly low limits for dental, prescription drugs, hospital stays, etc., and would likely not cover eyeglasses, orthodontics, medical devices, certain therapy etc. Under an HSA, all of these items can be covered at a fraction of the cost, in fact, the savings under an HSA can be quite significant – consider the following example:

Jesse is a small business owner, has a spouse and 2 school – aged children. If their medical/dental expenses were $2000 per year, they would have to pay this with ‘after-tax’ dollars, therefore requiring gross income of approximately $3000 per year. However, only a small portion of the expense on for medical would be allowable as a tax-credit on their personal taxes. (medical expenses must exceed 3% of your taxable income before any is allowed for a tax credit) If they were to obtain group insurance, lets assume they paid $300 per month for coverage. Although some this would be deductible by the business as employee benefits, a portion of the plan would be a taxable benefit to Jesse, and the plan would have restrictions.

Now, let’s assume Jesse sets up an HSA for their family. By having the company contribute $200 per month to the HSA, Jesse would effectively have $2400 per year of ‘tax-free’ money to spend on virtually any medical expenses. The company would gain the benefit of a 100% tax deductible amount of $2400 per year.

As the money ‘belongs’ to Jesse, she may determine what expenses to submit for payment; orthodontics, eyeglasses, physiotherapy, contact lenses, prosthetics… and the list goes on.

There are other great benefits to an HSA as well:

Employee retention products; you can establish an HSA for your employees, setting the contribution amount at whatever you want – all employees do not have to be treated equally. ‘Bonus’ payments may be added to the HSA, incentive prizes etc. You can add an insurance component to your HSA – if someone experiences a catastrophic event, the insurance will pay when you exceed the value of funds in your HSA. You can add emergency travel medical to your plan – safeguard for when you are out of the country. One of the best benefits, completely unlike insurance, because the money is YOURS, you can carry forward any unused values at the end of the year to the next year – you do not lose any of your money. Setting up an HSA is not difficult, and generally only takes a couple of days. There is a small setup charge, however, the tax advantages as well as the health advantages far outweigh this fee.

Continuing with our cover story, lets look at the tax benefits of the HSA program for Jesse:

Assume Jesse earns $50k per year and her spouse earns $45k per year. They have family medical expenses of $3,000 per year. To cover the ‘after-tax’ cost of $3k, they would have to earn roughly $4,500 before taxes. Then, they would be entitled to a medical expense credit of only $251.62 The ending result, They still expended more than $4,000 of gross income to pay for their $3,000 in medical expenses.

On the other hand – if the company contributed to their HSA, $250 per month, they would be out-of-pocket $0. The company would realize a 100% tax deductible expense of $275 per month. (An HSA is a ‘costplus’ program that carries a 10% administration fee, paid by the company – the employee never has to pay a fee.) From the company perspective, as they have a tax deductible expense of $3,300 per year, assuming a corporate tax rate of 22%, the corporation saves $726.00, therefore, the actual ‘cost’ to the corporation is only $2,574 to give Jesse the BENEFIT of $3,000 per year in FREE medical costs.

HSA’s are not only for Corporations, a sole-proprietor can also realize an even greater benefit – if their marginal tax rate is greater than 22%. The business receives 100% of the tax deduction, whereas personally, the individual would only be entitled to a small non-refundable tax credit.

CRA, in recent Tax Information Bulletins, completely endorses Health Spending Account Programs, get yours today and give your family the medical peace of mind you deserve, and start saving your hard earned money.

1st July 2010 starts a new financial year in Australia. With the new year, a new reduced rates of income tax is has been implemented by the Government. The following savings are a sample of what can be expected, the major beneficiaries are the middle income earners as you can see from the amounts below.

$600 per week the savings are $2.00

$900 per week the savings are $8.00

$1,200 per week the savings are $7.00

For the low income earners the low income tax offset has increase to $1,350 from $1,200, this means that the taxpayer can have extra earnings of $1,000 with out effecting their tax payable.

The new tax brackets are set out below for the 2011 financial year.

Taxable income Tax on this income

$1 – $6,000 Nil
$6,001 – $37,000 15c for each $1 over $6,000
$37,001 – $80,000 $4,650 plus 30c for each $1 over $37,000
$80,001 – $180,000 $17,550 plus 37c for each $1 over $80,000
$180,001 and over $54,550 plus 45c for each $1 over $180,000

The above rates do not include the Medicare levy of 1.5%, which is subject to income thresholds. Nor does it include any income tax offsets, these apply to the taxpayers individual circumstances.

There is a common misconception that as you move into a higher tax bracket, all of your earnings are taxed at the higher tax rate, thankfully this is not the case, only the income above the tax bracket is taxed at that rate.

Using the chart above if your income was $85,000, only $5k would be taxed at 37% not the full $85k.

Anybody having studied taxation knows what it means to do tax preparation for the past whole year. Sifting through the conundrums of the taxation is a real mental exercise. The use of computers and the Internet has considerably resolved the complexities in the understanding, calculation, filing, and payment of taxes.

Main Features

The software companies have regularly introduced the tax software that incorporates the changes made in the current financial year. Alternatively, these changes can be availed online in the form of updates. The software are developed with the help of accounting and taxation experts with the objective of making the whole process of tax preparation, filing, and payment easier and hassle free. These sites promise maximum deductions to reduce your taxable income and maximum refunds after the taxes are paid. Most of these incorporate the provisions of both the federal and state level taxes. Further, tax help is provided for individuals and businesses alike.

Companies offering online tax preparation usually offer different free and paid plans to the customers. Even the paid plans are offered free until the time one prints or files taxes online. Current tax news and customer reviews are also displayed on the site to help the visitors remain informed. If you are still not sure about anything, the site has the experts manning its customer service who can satisfy you. But who should be held responsible if any calculation goes wrong? Most of the online tax sites promise to pay the penalties and fines if there are calculation issues with the IRS. These also promise to file your tax returns in a way that the later audit does not find errors. There is a provision to import the accounting and financial data from the books maintained on your computer software.

Main Benefits

There are several benefits of the online medium of tax preparation. After entering the required information, the calculations are made with the in-built system. You do not have to go through the myriad of calculations involving addition of income from different sources, deductions, exemptions, and what not. All the related work can be done online within the confines of your home or office within a matter of a few hours. Some sites also allow you to make comparisons with the past records of taxes filed.

These are good alternatives for those people who wish to pay taxes without consulting accountants. So much so even the professionals use these mediums for tax preparation and e-filing the returns of their clients. The software for tax is compatible with the most of accounting software used in the United States, which facilitates the import of data from there for tax purposes. So you do not have to shuffle between them separately. There are online standardized forms for varied uses, and this save a lot of time of both the administration and the e-filing service providers.

Most of the sites provide comprehensive tax solutions to the individuals and organizations. They are very effective for filing simple returns; complex cases might require the expertise of trusted professionals. However, to many people, these are easy-to-use tools of tax preparation and filing.

Would you like to do taxes on your own this year? Now you can prepare and file your federal tax return online using free software available. Here are some tips that will help you do your income tax online easily.

You can consider using online free software or getting helps from the companies that offer tax preparation and e-filing options if you are not filing a simple 1040EZ form. The best option you can think of is Free File option provided by the IRS in association with some private software companies. If your Adjusted Gross Income (AGI) does not exceed $57,000, you are eligible for using this tax software for free. Also there are many companies offering e-filing option for free. If you visit the IRS website, you will easily search reliable company with the help of “Help Me Find A Free File Company”.

Those people who run small businesses, have rental properties, or may have met with major life changes in the past year may need to do taxes with the help of a professional accountant because in such cases, multiple forms will need to be filed. Many think that using and installing computer software is complex task, but it is not so. Some companies offer online software that does not need installation. You can operate it from anywhere if you have access to the internet.

If you are using software to prepare your federal returns online, do not miss to claim credits and deductions. Now claiming deductions and choosing credits is easy; the software will provide you with many deductions and you will have to choose those which suit you best. By choosing and claiming eligible deductions and credits, you can save the amount of your taxable income.

Once you complete your task of preparing your federal return, you can review it before submitting to the IRS. When you are sure that your return file is accurate and error-free, you can consider e-filing option. Don’t forget to choose the direct deposit option before sending your return file online. You can get your refund online fast as few as 10 to 14 days via direct deposit option.