IRS Debt Help

I just got done reading the 110 page EESA that passed the U.S. House today. I highly encourage people to read it themselves, rather than listen to the B.S. and hype from the media. Perhaps more important than the EESA itself is the 320+ pages of PORK attached to it. Congress at it's finest. I haven't read the pork yet, but I'm going to write this blog post as I skim the pork, and will report on what gems I find within.

First, the entire bill is here:

http://financialservices.house.gov/essa/essabill.pdf

The government's own summation of the sections, in only 6 pages (worth reading if you're not going to read the whole thing):

http://financialservices.house.gov/essa/eesabill_section-by-section.pdf

To start, let's go over the gist of what the EESA does.

Read more »

Hurricane Katrina and Hurricane Rita inspired Americans’ generosity. Literally millions of Americans gave generously, and even schoolchildren pitched in with bake sales and lemonade stands.

Used cars and trucks have always been popular charitable gifts, and in the hurricanes’ wake, they’re likely to become even more popular. Many charities have toll-free hotlines for car donations, with volunteers who pick it up from your home. This avoids the hassles you’d face if you sold the vehicle. And donors have traditionally claimed full “blue book” value for their gifts, even for vehicles in poor condition. (Gifts worth more than $5,000 have always required appraisals.)

Congress and the IRS have always encouraged charitable gifts. That’s why they’re deductible in the first place. But “abusive” deductions for beat-up cars have attracted IRS attention, and in late 2004, Congress and the President tightened the rules.

Your first step should be to verify that the organization you give to is a qualified charity. If there’s any doubt, you can verify the organization’s status with the IRS by calling 877-829-5500. Make sure you have the organization’s correct name and address.

Under the new rules you can deduct the vehicle’s “fair market value” only if the organization you give the car to uses it for “exempt” purposes. For example, your church might use your old van to transport parishioners, or your local Habitat for Humanity might use your old truck to transport building supplies.

In most cases, however, the charity that gets the vehicle sells it to raise cash. Under the new rules, if the charity sells the vehicle, your deduction is limited to the charity’s actual proceeds. If the charity sells it for more than $500, they’ll have to supply you with a receipt stating the vehicle was sold in an arm’s-length sale and reporting the gross proceeds from the sale. You’ll have to attach the receipt to your return and file it with Form 8283, where you report noncash charitable donations.

For more information, or to evaluate your own potential gift, contact our office toll free at 1-866-627-7654.

Are you one of the millions of Americans looking at a second home? Vacation homes give you similar tax breaks as your primary home. They also give you the chance to earn tax-free or tax-advantaged income. As the “baby boom” generation grows older and more affluent, vacation home prices are rising, in some areas even faster than primary residences. This combination of income and appreciation is making second homes attractive investments.

You can deduct mortgage interest you pay on up to $1 million of “acquisition indebtedness” to buy your primary residence and one additional residence. If your total mortgage indebtedness tops $1 million, you can still deduct the interest you pay on their first $1 million. If one mortgage carries a substantially higher rate than the second, it makes sense to deduct the higher interest first to maximize deductions.

You don’t need to buy an actual house (or even a condominium) to take advantage of second-home mortgage interest deductions. You can deduct interest you pay on a loan secured by a timeshare, yacht, or motor home so long as it includes sleeping, cooking, and toilet facilities.

You can’t exclude gains from selling your vacation home the way you can for selling your primary residence. But you can still use the exclusion to save tax when you sell your vacation property if you convert it to your primary residence. Let’s say you live in Chicago and you buy a vacation home in Hilton Head. You can sell your Chicago home once your children are grown, and exclude up to $500,000 in gain. If you move to your Hilton Head home and occupy it as your primary residence, you can sell it two years later and exclude up to another $500,000 in gain.

You can also rent your home to earn income and help finance the cost of owning the home. If you rent for 14 days or less, your income is tax-free. Longer rentals are taxed according to how long you use it personally. (Personal use includes days your family uses the house, days you rent it for below-market rates, days you trade its use for someplace else, and time you donate as a charitable gift, but not days you use to prepare it for rental.)

If you use it personally for more than the greater of 14 days or 10% of the rental days, it qualifies as residential property. You’ll have to report your income—but your expenses may offset it enough to avoid paying tax. To figure the rental portion of mortgage interest and property taxes, divide the days of rental use by 365. For maintenance and utilities, divide the days of rental use by the days of total use (including rental and personal use). You can deduct rental expenses such as advertising, commissions, and travel—but not depreciation. You can deduct expenses up to your income, but not beyond. (Depending on your income, you might still itemize excess mortgage interest and property tax.)

If you use it personally for less than the greater of 14 days or 10% of rental days, it qualifies as rental property. To figure the rental portion of your mortgage interest, property taxes, maintenance, and utilities, divide the days of rental use by the days of total use. (There’s no separate formula for “empty days” with mortgage interest and property taxes as there is when you treat the home as residential property.) You can deduct rental expenses such as advertising, commissions, and travel. And you can deduct depreciation. If the property generates a loss, you can deduct it against outside income if you qualify for the rental real estate loss allowance or you qualify as a real estate professional.

Together, this combination of tax-advantaged income, price appreciation, and vacation fun are making second homes America’s favorite investment. For more information, please give us a call at 1-866-627-7654.

Home prices, which had been on a tear, have leveled out and even fallen in places. The housing “bubble” appears to be over. Is real estate still a good place for your money?

Despite uncertain real estate prices, buying a house is still a smart choice for most families. Buying, rather than renting, replaces nondeductible rent with deductible mortgage interest. You can borrow tax-free against your home’s growing equity. And you can sell your home for up to $500,000 profit, tax-free.

Mortgage Interest

Tax-deductible mortgage interest is the cornerstone of most families’ tax planning. You can deduct interest on up to $1 million of “acquisition indebtedness” you use to buy or substantially improve your primary residence and one additional home. You can deduct interest on up to $1 million of construction loans for 24 months from the start of construction. (Interest before and after this period is nondeductible.) And points you pay to buy or improve your primary residence are generally deductible the year you buy the home if paying points is an established practice in your area.

Home Equity Interest

You can deduct interest you pay on up to $100,000 of home equity loans or lines of credit secured by your primary residence and one additional residence. Using home equity debt to pay off cars, colleges, and similar debts lets you convert nondeductible personal interest into deductible home equity interest.

Make sure you compare after-tax rates before you refinance consumer debt with home equity debt. If you can buy a car with a special interest rate, your nondeductible personal interest may still cost less than deductible home equity interest. If you can transfer a credit card balance to a new card with a low introductory rate, you could save money and avoid the paperwork needed to refinance your home.

If you pay points to refinance your home, you can’t deduct those points immediately. However, you can amortize them over the life of the loan. If you pay off the loan before fully deducting your points (including refinancing with a new lender), deduct the remaining balance the year you retire the loan.

You can still deduct the interest you pay on home equity balances over $100,000 if you use the proceeds for a deductible purpose. If you use home equity debt to buy stocks, for example, you can deduct it as investment interest; if you use it to finance your business, you can deduct it as a business expense.

Property Tax

You can also deduct property taxes you pay on your primary residence and vacation homes. Microsoft founder Bill Gates can deduct over $1,000,000 he pays on his Seattle-area compound. But be aware that property tax deductions may be limited by the AMT.

Tax-Free Income From Selling Your Home

The Taxpayer Relief Act of 1997 made important changes when you sell your primary residence. The old law, effective for sales before May 5, 1997, let you roll unlimited gains into a new home and offered a one-time $125,000 exclusion if you sold your home after age 55. The new law lets you exclude up to $250,000 of gain ($500,000 for joint filers) every two years, with no need to roll your gains into a new home.

You can exclude $250,000 if:

1. You owned the home for two of the last five years,
2. You occupied it as your primary residence for two of the last five years, and
3. You haven’t used the exclusion within the last two years.

You and your spouse can exclude up to $500,000 if:

1. Either of you owned it for two of the last five years
2. Both of you used it as your primary residence for two of the last five years, and
3. Neither of you has used the exclusion within the last two years.

You can exclude part of your gain (calculated by dividing the number of months you qualify by 24) without meeting that two-year minimum, if your move is due to:

• Change in employment (you, your spouse, a co-owner of the house, or any other person whose principal abode is in the home accepts a job whose location is at least 50 miles farther from the home than their previous place of employment);

• Health (a qualifying person or their relative moves to treat a disease, illness, or injury or to obtain or provide medical care for a qualified individual); or

• “Unforeseen circumstances” (including, but not limited to, involuntary conversion, natural or man-made disaster, or a qualifying individual’s death, unemployment, change in employment or self-employment status, divorce, or multiple births from the same pregnancy).

Taking advantage of the tax shelter over your head won’t guarantee gains. You have to consider how long you’ll own your home, the cost of maintaining and repairing it, and the eventual cost of selling it. But the “tax shelter over your head” is still likely to prove a long-term winner.

Charitable gifts let you do well for yourself while you do well for others. And Congress loves to be on the side of doing well by doing well for others. The tax code is generous to a fault regarding charitable gifts. In fact, many tax reformers include deductions for charitable gifts in their otherwise “flat” tax proposals.

There are several ways to write off charitable gifts depending on what you give and any “strings” you keep attached. You can deduct up to 50% of your adjusted gross income for cash gifts to “501(c)(3) organizations” or public charities. These include churches, symphonies and museums, schools and colleges, and traditional charities like the United Way. If you give more than 50% of your adjusted gross income in a single year, you can carry forward the excess for 15 years. You can deduct up to 30% of your adjusted gross income for cash gifts you make to private foundations. If you give more than 30% of your adjusted gross income, you can carry forward that excess for up to five years.

Depending on how much you give, you may need some paperwork to audit-proof your deduction. If your gift of $75 or more entitles you to dinner or a banquet, the organization has to disclose the value of those benefits. (You don’t need to reduce your deduction for token items such as calendars and tote bags or “intangible religious benefits.”) If you give more than $250, you'll need a written receipt dated no later than the filing date of your return. If your donation to a college entitles you to buy athletic tickets, you can deduct 80% of your gift. The right to buy tickets is valued at 20% of the gift, regardless of the amount.

You can deduct charitable gifts as business expenses if you can show they bear a direct relationship to your business and you make them with a reasonable expectation of financial return commensurate with the amount paid. You can offer charitable gift coupons, pay part of your income or sales to charity, or link gifts to the business you generate through the charity.

Gifts of Property

Many donors claim rich deductions for charitable gifts without ever spending a dime of cash. Don’t overlook gifts of property and appreciated assets for valuable deductions:

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Gifts of clothing, furniture, electronics, and household items are deductible at fair-market value, such as the price they would bring at a resale shop. These deductions can be far more valuable than you realize. Consider buying software, available at any office-supply store, for tracking gifts and their value. You might be surprised how much you save!

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Gifts of life insurance are valued at the policy’s cash value, plus any ongoing premiums you pay through the charity.

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Deductions for remainder interests in your home or other property are determined according to the property’s value, your age, and the current “Section 7520” rate (published monthly by the IRS).

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If you’re selling your home or other property that includes a structure to be demolished after the sale, consider donating the structure to your local fire department for “target practice.” You’ll get a charitable deduction equal to the structure’s fair market value!

Gifts of Appreciated Assets

Appreciated assets such as securities, real estate, and artwork that you’ve held for more than a year make ideal charitable gifts.

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You can deduct the fair market value of the gift. (For securities, fair market value is the average of the high and low sale prices on the date of the donation. For real estate, artwork, and personal property, you’ll need an appraisal. Appraisal fees are a miscellaneous itemized deduction.)

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You avoid tax on capital gains you would pay if you sold the property then gave cash.

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If you give art or tangible personal property (books, furniture, etc.) your deduction depends on how the charity plans to use it. If the charity plans to use it for “exempt” purposes, such displaying donated art for students to study, deduct the fair market value. If the charity sells the gift, your deduction is limited to your basis or actual cost, whichever is less.

Used cars and trucks have become popular charitable gifts. But Congress and the IRS have cracked down on abusive valuations. For gifts after December 31, 2004 you can deduct the vehicle’s fair market value only if the recipient uses it for “exempt” purposes (such as a church using a van to drive parishioners). If the charity sells the vehicle, your deduction is limited to the charity’s actual proceeds. If you claim more than $500, you’ll generally have to attach a certification to your return that states the vehicle was sold in an arm’s-length sale and includes the gross proceeds from the sale.

Volunteer Expenses

You can’t deduct the value of time you volunteer to charitable organizations. But you can deduct the following volunteer expenses as charitable gifts on Schedule A:

1.

Travel, meals, and entertainment related to volunteer and charitable activities (actual expenses or 12 cents per mile, plus parking and tolls)

2.

Telephone calls and office supplies

3. Convention expenses

4.

Part of organizational dues (the organization can tell you how much)

5.

Uniforms and work clothes, including laundry and dry-cleaning expenses, for clothing not usable as ordinary street clothing (Girl Scout uniforms, etc.).

If you haven't filed tax returns in a number of years and are in the process of playing "catch up" in response to IRS collections actions, don't forget to dig through your files for proof of charitable gifts. Claiming these deductions, rather than just rushing through the completion of the tax return in order to get them done at the demand of the IRS, can save you significant amounts of money on your tax bill.

If you have additional questions about the tax benefits of gifting, feel free to give us a call at 1-866-627-7654.

Our last post discussed the use of Medical Expense Reimbursement Accounts. This post will discuss another much more popular option your self-employment health insurance needs.

Health Savings Accounts (“HSAs”) let you buy high-deductible health insurance to cut monthly premiums, then establish deductible savings accounts for routine medical costs. You (and your employees, if any) can establish HSAs if you meet four tests:

· 1.

You’re covered by a high deductible health plan (“HDHP”) with deductibles of at least $1,000 (singles) or $2,000 (families) and out-of-pocket limits up to $5,100 (singles) or $10,200 (families). The plan can’t provide any benefit, other than certain preventive care benefits, until the deductible for that year is satisfied. This means no drug card—you’re not eligible if you’re covered by a separate plan or rider offering prescription drug benefits before satisfying your policy deductible.)

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2. You’re not covered by any plan that isn’t an HDHP, either individually, as a spouse, or as a dependent.

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3. You’re not eligible for Medicare.

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4. You can’t be claimed as a dependent on anyone else’s return.

If you qualify to open an HSA, you can contribute 100% of the insurance deductible up to $2,650 (singles) or $5,250 (families). If you or your spouse is age 55 or older, you can make extra “catch up” contributions up to $600 in 2005. (This amount climbs $100 annually to $1,000 in 2009.) If you and your spouses are covered by different HDHPs, you can contribute up to the lower deductible.

Withdrawals for “qualified medical costs” are tax-free. These include any deductible medical expense or nonprescription drug that isn’t reimbursed by insurance. You can use your HSA to pay for qualified long-term care premiums, COBRA continuation coverage, health insurance while you receive unemployment compensation, and Medicare premiums (but not “medigap” coverage). Withdrawals for any other purpose are taxed as ordinary income plus a 10% penalty.

MERPs and HSAs won’t make your visit to the doctor less painful. But they may be the best kind of tax strategies because they give you new deductions for money you’re already spending. For more information about the tax benefits of HSA's, please give us a call at 1-866-627-7654

Rising gas prices may capture headlines, but today’s soaring health care costs are an even more consistent financial threat. The National Coalition on Health Care reports that in 2006, the average family health insurance premium topped $1,200 per month. That’s more than the average family’s mortgage—and health care costs are rising faster than interest rates!

Raising your health insurance deductible just a few thousand dollars can cut your premium by up to half. But that leaves you responsible for out-of-pocket costs. And even if you itemize, those are deductible only to the extent they exceed 7.5% of your adjusted gross income. Is there a way to capture premium savings from high-deductible insurance and tax savings for out-of-pocket expenses? Fortunately, there are two. This post will discuss the first option, and we'll post the next one in coming days.

If you have self-employment income, even from a startup or sideline business, you can take advantage of a little-known tax break to save a bundle on your family’s health care costs. Medical expense reimbursement plans (“MERPs”) let you reimburse your employees, their spouses, and their dependents for uninsured medical costs. Plan benefits are deductible by the business, and nontaxable to the employee. Here’s how they work:

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You have to establish the plan for employees. If you operate as a proprietorship, partnership, LLC, or “S” corporation, you're considered “self-employed,” and not eligible. If you’re single, you can establish a C corporation and pay benefits to yourself as an employee. If you’re married, you can hire your spouse and pay benefits to them. (If you operate as an S corporation, you and your spouse are both considered self-employed. In that case, segregate part of your income through a proprietorship or C corporation and pay benefits through that entity.)

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You have to offer benefits to all employees. However, you can exclude those under age 25; those who regularly work less than 35 hours per week; those who work less than nine months out of the year; and those who have worked for you for less than three years.

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You’ll need a written plan document. No special IRS filings are required for plans with less than 100 employees. You’ll deduct benefits as “employee benefits” on your business return, which may also lower self-employment tax bill.

Example: You’re self-employed as a real estate agent. You hire your spouse to provide marketing support, and establish a MERP for his or her benefit. The plan covers your employee, their spouse (meaning you!) and your dependents.

Once you’ve established the plan, you can still deduct 100% of your health insurance costs. This includes major medical and supplemental coverage, Medicare Parts A and B coverage, qualified long-term care, and “Medigap” coverage. You can even reimburse your spouse for any after-tax premiums they pay through their employer.

You can also write off 100% of your out-of-pocket costs and bypass the 7.5% floor for itemized deductions. This includes routine expenses such as co-pays, deductibles, and prescriptions; occasional expenses such as eyeglasses, teeth cleaning, and chiropractic care; and big-ticket items like orthodontics, fertility treatments, and schools for learning-disabled children. It also includes nonprescription medicines and health-care supplies. You can reimburse your employee, or you can use business dollars to pay health-care providers directly. For more information, please call our office toll free at 1-866-627-7654.