Archive for May, 2012|Monthly archive page

Losing Your Home? Favorable Tax Provisions Expire 12/31/12.

Originally published in the Pacific Grove Hometown Bulletin

May 16, 2012

If you think you may not be able or willing to hold on to your home for the long-term, you should seriously consider your options for short sale or foreclosure as soon as possible.  At the end of this year, Internal Revenue Code Section 108(a)(1)(E) is set to expire (California tax law conforms to the expiration also).  This is the provision that allows people to possibly exclude from income, cancelled debt when recourse loans on their primary residence are higher than the value of the home.  These transactions take three to 12 months to complete, so time is of the essence.

Between foreclosures and short sales, short sales are your best option in this regard.  This is where you find a buyer and the lender accepts the buyer’s offer, even though it is less than what you owe the lender.  Current law in California forces lenders to cancel the remaining debt as of the date of the short sale and prohibits them from pursuing your personal assets if they agree to the short sale.  A foreclosure does not guarantee the lender will not pursue you for the remaining debt.  Even if they do decide to cancel the debt, it may not be until after the end of this year.

Whether debt is cancelled by short sale or possibly by foreclosure, the cancelled debt is potentially taxable income to you.  If you did not take cash out during past refinances, or to the extent you put cash-out back into improving the property, you will likely be able to exclude the cancelled debt income from your taxable income due to code section 108(a)(1)(E)…until the end of this year.  After that, you will likely only be able to exclude the debt if, and only to the extent you are insolvent (more liabilities than assets).  Bankruptcy is another option, but it must be filed before you lose the property – in other words, plan early.

Imagine $200,000 of income on your tax returns from cancelled debt, generating an extra $75,000 or more of tax.  Many people will find these transactions to be the largest potentially taxable transactions in their life, so it is important to seek competent professional advice, plan appropriately, and avoid the tax if at all possible.

Prior articles relating to foreclosures and short sales are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

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Paying the IRS: Installment Agreements

Originally published in the Pacific Grove Hometown Bulletin

May 2, 2012

Hopefully by now you have filed your tax returns.  If you decided to file for an extension, that is fine, but keep in mind you have not extended your time to pay any tax owed.  That was still due on April 17th.  Filing the extension was key, however, because a late filing penalty is assessed at five percent of the balance owed for every month the return is late (capped at 25 percent).  If you do not owe taxes, you are fine, even if you did not file an extension, since the penalty is based on the balance owed.

If you did file your return and you could not come up with enough cash to pay the IRS, you have payment options.  If you feel you can pay the IRS within 120 days, call 1-800-829-1040 and advise them of this fact and they will not harass you for payment and you can avoid the cost of setting up an installment agreement.

If you need to make payments over time by setting up an installment agreement, the IRS will generally allow this quite easily if your balance is below $25,000, you can pay it off in seven years, and you are in good standing with the IRS.  This is accomplished by filing Form 9465.  There is a $105 fee to set up an installment agreement, unless you elect electronic payment withdrawals from your bank – this cuts the fee down to $52.  Interest accrues at a variable rate which changes every quarter (currently three percent per annum) and late payment penalties may also still be assessed (1/2 percent per month, or portion thereof – approximately six percent per annum).  Other minor penalties may apply also.

In practice, I have never had an installment agreement under $25,000 turned down or even questioned by offering a monthly payment amount equal to the starting principal balance divided by 60. If you owe over $25,000, you have to provide detailed information about your financial situation through additional forms before an installment agreement is granted.  With an installment agreement in place, you avoid harassing letters and other possible collection actions such as levying bank accounts, garnishment of wages, forcing the sale of assets, etc.  (Forcing the sale of assets is rare unless you owe at least $100,000…and are obstinate!)

If you have large tax debts that may be difficult or impossible to pay there are other less friendly avenues such as offers in compromise, or even bankruptcy filing if the tax debts are at least three years old.

California has a less generous installment agreement option, but can be requested by filing FTB Form 3567.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.