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Wednesday, March 16, 2011

Mortgage Debt Forgiveness

If your mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income.

Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.

The limit is $1 million for a married person filing a separate return. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.

To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.

If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.

If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.

For more information about the Mortgage Forgiveness Debt Relief Act of 2007, contact me or visit IRS.gov. A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. Email me for a copy or taxpayers may obtain a copy of this publication and Form 982 either by downloading them from IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Health Insurance Tax Breaks for the Self-Employed

You may be able to deduct premiums paid for medical and dental insurance and qualified long-term care insurance for you, your spouse, and your dependents if you are one of the following:

• A self-employed individual with a net profit reported on Schedule C (Form 1040), Profit or Loss From Business, Schedule C-EZ (Form 1040), Net Profit From Business, or Schedule F (Form 1040), Profit or Loss From Farming.

• A partner with net earnings from self-employment reported on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., box 14, code A.

• A shareholder owning more than 2% of the outstanding stock of an S corporation with wages from the corporation reported on Form W-2, Wage and Tax Statement.

For self-employed individuals filing a Schedule C, C-EZ, or F, the policy can be either in the name of the business or in the name of the individual.

For partners, the policy can be either in the name of the partnership or in the name of the partner. You can either pay the premiums yourself or your partnership can pay them and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the partnership must reimburse you and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business.

For more-than-2% shareholders, the policy can be either in the name of the S corporation or in the name of the shareholder. You can either pay the premiums yourself or your S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts on Form W-2 as wages to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business.

Thursday, March 3, 2011

Webinar: Business taxes for the self-employed

The free IRS March 29 webinar offers an overview of reporting profit or loss, estimated tax payments, business expenses and recordkeeping.

Learn about:
Reporting profit or loss from a business or profession
Self employment tax and estimated tax payments
Schedule C and C-EZ
Deducting business expenses
Husband and wife businesses
Recordkeeping

Follow the link below to the IRS website for registration.

http://www.visualwebcaster.com/IRS/77024/reg.asp?id=77024

Tuesday, March 1, 2011

Gifting your Tax Refund

Here's the way it works:

For 2010 tax returns, new savings bond options are now available. Last year, if the taxpayer chose to receive a savings bond as part of the refund, it could only be issued in the taxpayers’ name. This year, those receiving tax refunds can buy savings bonds for themselves and up to two other individuals. Taxpayers can designate anyone to receive a savings bond and also designate the co-owner or beneficiary.

Taxpayers who claim a tax refund on Form 1040 can use Form 8888, Allocation of Refund (Including Savings Bond Purchases) to split their refunds. Refunds can be directed into bank accounts and other financial institutions where their mutual funds or retirement accounts are managed and to purchase U.S. Series I Savings Bonds.

Taxpayers can choose to use a portion of the refund to buy up to $5,000 in low-risk savings bonds, which earn interest and protect owners against inflation. The bonds must be purchased in $50 increments. Any remaining refund amounts can be refunded by paper checks or direct deposit.

The savings bonds purchased through the refund program are U.S. Series I Savings Bonds. Their composite interest rate consists of a fixed rate and an inflation-based rate, adjusted every six months, on May 1 and November 1.

For more details, see the instructions for Form 8888, available by emailing me, or from www.irs.gov

Did you Take an Early Distribution from Your Retirement Plan? Considering it?

Some of you may have needed to take an early distribution from your retirement plan last year. Or you may be thinking about it. However,you need to know that there can be a tax impact to tapping your retirement fund.

Payments you receive from your Individual Retirement Arrangement before you reach age 59 ½ are generally considered early or premature distributions. Early distributions are usually subject to an additional 10 percent tax.

Distributions you rollover to another IRA or qualified retirement plan are NOT subject to the additional 10 percent tax. But, a very important but, you must complete the rollover within 60 days after the day you received the distribution. The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.

If you made nondeductible contributions to an IRA and later take early distributions from your IRA, the portion of the distribution attributable to those nondeductible contributions is not taxed.

If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed. If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.

There are several exceptions to the additional 10 percent early distribution tax, such as when the distributions are used for the purchase of a first home, for certain medical or educational expenses, or if you are disabled.

For more information about early distributions from retirement plans, the additional 10 percent tax and all the exceptions, please contact me to discuss your individual tax situation.


IRS Publication 575, Pension and Annuity Income and Publication 590, Individual Retirement Arrangements (IRAs) are also available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).