Thursday, April 29, 2010

Think Twice Before Mailing In That Key

Are you one of the scores of homeowners who are considering walking away from a mortgage you can’t afford? Or maybe your lender has agreed to a short sale as a way to get the property off their books. Before you make either of these moves, you better understand the tax ramifications. Otherwise, you could end up with a big, fat bill from the IRS. In a nutshell, here’s the rule: If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount as income for tax purposes, depending on the circumstances. For example, suppose you borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation in debt of $8,000, which generally is taxable income to you. Meaning if you’re in the 20% tax bracket, you’ll have to cough up another $1,600 for taxes. But thanks to the Mortgage Forgiveness Debt Relief Act of 2007, there are exceptions that might apply to you. The most notable is that the amount forgiven on a mortgage for a principal residence is exempt up to $2 million or $1 million if married filing separately. So for most people, they won’t have a tax problem. However, before you breathe a sigh of relief, make sure the home is your principal residence. Because borrowers who don’t live in the house they’ve mortgaged could find themselves in a real pickle. Let me give you a real life example: I have a close friend who got caught up in the real estate frenzy back in 2004 and 2005. He and his growing family lived a small house that was complete paid for and probably worth $75,000 before the bubble hit. In a few years, it had shot up to over $300,000. That’s when they decided to buy a bigger home in a nicer neighborhood. They got hooked up with a mortgage broker who conned them into a couple of suicide loans. And like magic, they were in the new home with nothing down and without selling the old house! What happened next could be the plot for a Stephen King novel ... His interest rates skyrocketed, now he can barely make the payment on the new house. And as far as the old house goes: His tenant moved out, and he’s stuck with a $300,000 mortgage on a house that’s worth about $90,000. He’s trying to get the bank to reduce the principal owned. But they won’t budge. The best they’ll do is stay with the original teaser interest rate. So there the place sits … no one living in it and the mortgage not getting paid. Mail them the keys, and forgetting about the whole thing is one option he’s considering. But look at the potential tax liability since the house is not their primary residence: $300,000 owed minus the $90,000 selling price = $210,000 forgiven At a 30% tax rate, he might have to come up with $70,000 to pay the IRS. He doesn’t have that kind of money. And if he did, he sure wouldn’t want to use it to pay taxes. I told him that he needs to get in touch a good tax attorney to see if there is anyway to cut a deal with the IRS. Bankruptcy is always a last resort. So if you find yourself in similar jam, be sure to get expert advice before you drop the key in the mailbox. Otherwise you may find Geithner’s posse at your doorstep. And for the complete story on canceled debts, go to IRS Publication 4681. Best wishes, George P.S. I’m now on Twitter. Follow me at http://twitter.com/efinancialwrite for frequent updates, personal insights and observations on how to have a healthy retirement. If you don’t have a Twitter account, sign up today at http://www.twitter.com/signup and then click on the ‘Follow’ button from http://twitter.com/efinancialwrite to receive updates on either your cell phone or Twitter page.

Thursday, April 22, 2010

What You May Not Have Known About Health Care Reform

You’ve probably had about all you can stand of listening to the politicians and talking heads on TV going on and on about health care reform. And you may have even thought you had a basic understanding of what they were up to. But have you taken a look at some of the ways they’re going to pay for it? For example, The threshold for you to claim an itemized deduction for unreimbursed medical expenses has rocketed from 7.5% to 10%, Do you frequent tanning salons? Expect to pay a 10 percent excise tax, And if you buy devices such as wheelchairs, you’ll pay a 2.3 percent excise tax. There is, however, a provision that should really get your blood boiling: Effective December 31, 2012, there will be a 3.8% excise tax on net investment income for single filers reporting income over $200,000 and joint filers reporting income over $250,000. Net investment income is defined in the Bill as: “The excess (if any) of the sum of (i) gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of trade or business…” This the first time ever that Americans will have to pay Medicare taxes on investment income. And interesting to note is that President Obama had asked for a 2.9% tax. So you can thank Congress for making it higher. Of course, for the time being this extra tax only applies if you make big bucks. But I think it’s just the beginning. The way I see it, taxing Roth IRA withdrawals or life insurance death benefits are a real possibility. How about reducing the threshold on taxable Social Security benefits? Or tacking a Social Security tax on annuity income? After that, the sky’s the limit, and middle-income Americans are bound to be the next targets. What ever it is, you can bet your bottom dollar that it won’t be the last time elected officials in Washington go after your retirement income to finance the soaring national debt. Best wishes, George

Tuesday, April 13, 2010

How to Avoid Tax-Filing Stress

Tax filing time is just around the corner — a tad more than 48 hours in fact. But you can easily avoid the hassle. All you have to do is send in a request for an extension. This will give you until October 15, 2010, to file your 2009 federal return. Of course, Geithner’s tax posse wants any money you owe by April 15. So you need to do a rough estimate to figure out your liability. But at least you can avoid the stress of completing a return. Here’s the link that’ll take you to Form 4868. Fill it in and you can take a breather for six months. And click here for more details on filing extensions. Also note that this form does not give you a filing break on state income taxes. Best wishes, George

Thursday, April 8, 2010

Three Cheers for Spirit

By now you’ve surely heard about Spirit Airlines latest charge … up to $45 for a carry-on bag. And boy, are travelers upset. Here's what I say … it couldn’t have come at a better time! I really like traveling on Spirit.

  • They fly direct from Ft. Lauderdale to my favorite destination, Costa Rica.
  • Their prices are lower than other carriers.
  • They offer extra wide seats and extra legroom for a few more bucks.
  • Drinks and snacks are available at a reasonable price.

Now back to the carry-on bag uproar … I can understand people not wanting to check their luggage. Most airlines charge a fee, you have to wait for your things, and bags have been known to get lost. But you know what really fries me: When travelers bring so much crap with them that there’s no place to put it! A few weeks ago, I was on a Delta flight to Ft. Lauderdale. And it was packed. One of the last guys to get on had a roll-on bag. It was too big to fit under the seat in front of him, so he went searching for overhead space. Up and down the aisle he went trying to cram his bag in bins where there just wasn’t any room. The flight attendant offered to check his bag. But he wanted no part of that … “fragile items inside,” he said. The two of them went back and forward: He whined that they should make space for his bag; she calmly explained that the plane wouldn’t move until he let her take the bag. After a handful of other passengers yelled some obscenities at this guy, he gave in … bitching all the way. This was hardly an isolated case. I’ve seen it way too many times. So if Spirit can encourage travelers to stop bringing so much stuff aboard the plane by charging them a hefty fee for doing so — which helps keep my fare low — good for them! Happy traveling, George

Tuesday, April 6, 2010

IRA Mistake Easy to Fix

A reader had the following question: ”George, I intended to rollover an IRA in the amount of $22,000. I contacted my broker and they sent me check for that amount. I then contacted another broker and purchased an IRA for the same dollar amount within the 60-day window. Now when my 1099-R from the first broker arrived they had indicated that it was a normal distribution. Meaning that it was taxable! “My question is what form/s do I need to correct this dumb mistake I made by not thinking ahead and doing a rollover instead of a custodial transfer. Thanks in advance for your time and trouble.” With a little research on the IRS web site, I found an answer for him: Reporting rollovers from IRAs. Report any rollover from one traditional IRA to the same or another traditional IRA on Form 1040, lines 15a and 15b; Form 1040A, lines 11a and 11b; or Form 1040NR, lines 16a and 16b. Enter the total amount of the distribution on Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a. If the total amount on Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a, was rolled over, enter zero on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b. If the total distribution was not rolled over, enter the taxable portion of the part that was not rolled over on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b. Put “Rollover” next to line 15b, Form 1040; line 11b, Form 1040A; or line 16b, Form 1040NR. See the forms' instructions. So if you ever have questions on IRAs, IRS publication 590 is a terrific resource to check with first. Best wishes, George