Five Facts to Know about AMT, by Chicago Accountants:

The Alternative Minimum Tax may apply to you if your income is above a certain amount. Here are five facts the IRS wants you to know about the AMT:

1. You may have to pay the tax if your taxable income plus certain adjustments is more than the AMT exemption amount for your filing status.

2. The 2012 AMT exemption amounts for each filing status are:

  • Single and Head of Household = $50,600;
  • Married Filing Joint and Qualifying Widow(er) =      $78,750; and
  • Married Filing Separate = $39,375.

3. AMT attempts to ensure that some individuals and corporations who claim certain exclusions, tax deductions and tax credits pay a minimum amount of tax.

4. You should use IRS e-file to prepare and file your tax return. You figure AMT using different rules than those you use to figure your regular income tax. IRS e-file software will determine if you owe AMT, and if you do, it will figure the tax for you.

5. If you file a paper return, use the AMT Assistant tool on IRS.gov to find out if you may need to pay the tax.

We prepare tax returns for our clients who owe AM.  If you need help, please contact us, the Chicago Tax Accountants at 773-728-1500.  If you need help with filing extentions, please call us or email us at asif@taxcutters.com and we will help you out.

Short Sale or Foreclosure – the Income Tax Consequences

We are CPAs in Chicago and provide the following summary for the benefit of Taxpayers in Chicago and surrounding suburbs.

These days a lot of home owners or real estate investors are encountering numerous questions about the tax consequences of these situations. That’s why it’s more important than ever for real estate owners to understand the basics of how the IRS views tax forgiveness.

How does the IRS view a short sale or foreclosure?

short sale is the discount a mortgage holder may allow in order to sell the property, even though doing so will short or discount the note. This generally results in a benefit to the debtor because the mortgage is reduced.

The process, of course, is different in a foreclosure, but the result is essentially the same.  The mortgage holder forecloses on the property, takes possession or sells the property on the courthouse steps, and will probably end up losing on the original mortgage. In effect, the borrower usually doesn’t have to pay the full mortgage, and whatever the lender can get for the property reduces the mortgage amount and the lender will often take a loss on the rest.

IRS frankly doesn’t care if a property is going through a short sale or foreclosure. The IRS is going to determine if Forgiveness of Debt took place and if it should be taxed to the taxpayer. Keep in mind though that the lender does not always forgive debt in a foreclosure or short sale. If the lender gets a deficiency judgment or comes after the homeowner for the unpaid amount, there is no debt forgiveness and thus no taxable income.

However, for situations where the lender does forgive the debt, determining what should be taxed can be a complicated question with lots of variations based on the facts and circumstances.

Keep in mind that, in almost every situation, the IRS boils the transaction down to the analysis of four questions:

.Question 1: Was the property sold for less than the mortgage or mortgages on the property?

Easy to calculate, simply add up all of the debt on the property (first and second mortgages included), and subtract it from the final sales price. If the result is a negative number, then there is a presumption the seller or prior owner is facing Forgiveness of Debt Income.

In case of foreclosure, it’s a little more difficult to determine the amounts in the equation above, because sometimes the bank/mortgage holder hasn’t sold the property yet; they simply took possession of the property in the foreclosure. Essentially, the calculation can’t be completed until the lender sells the property and their loss is determined.

Question 2: Was the mortgage or mortgages considered recourse or non-recourse debt?

If there is a presumption of debt forgiveness as determined in Question 1, the taxpayer next has to find out if the debt is recourse debt. This simply means the debtor signed personally guaranteeing the debt, or in other words, is personally obligated to pay the mortgage. This is actually an easy fact to determine.

A quick document review by an attorney can help the homeowner determine if the debt is recourse or not. The good news is if they aren’t personally liable, then they don’t have to pay the debt and they don’t have Forgiveness of Debt Income.

            Question 3: Is there Forgiveness of Debt Income after the basis on the property and any loss is calculated?

Often taxpayers overlook this aspect of the analysis.  Assuming there is recourse debt, and hence Forgiveness of Debt Income, taxpayers shouldn’t forget to calculate their loss on the property as a whole. This loss can offset any Forgiveness of Debt Income.

In this more complicated equation, the taxpayer would start with the sales price of the property and then subtract the adjusted basis on the property (i.e., the net cost for the property after adjusting for various items like depreciation or home improvements). This process will tell the homeowner if there is a gain or loss on the property. In sum, a loss would be deductible against the Forgiveness of Debt Income. Note, however, that a primary residence is going to be treated differently during this stage of the analysis (see below).

If there is Forgiveness of Debt Income from recourse debt and the loss on the sale doesn’t wipe out the gain, or it isn’t a primary residence, then the taxpayer’s only option to avoid being taxed on the forgiveness is to qualify under the insolvency or bankruptcy rules provided by the IRS. Essentially, these rules require the taxpayer’s total liabilities to exceed total assets, whether married or single (the details of which are discussed in IRS Publication 4681).

One final option that doesn’t allow the taxpayer to discharge the income but permits deferring the tax over time is to reduce the basis on other real estate owned by the taxpayer by using Form 982.

Question 4: Was the property in question the primary residence of the taxpayer?

The rules have been changed when it comes to principal or primary residences. Congress passed and President Bush signed into law the Mortgage Forgiveness Debt Relief Act of 2007 to provide relief to families who were going through a short sale or foreclosure on their primary residence through the end of 2012. This law essentially wipes out any acquisition indebtedness (not second mortgages unrelated to the purchase) and is a specific election made on a tax return. (Note there is a limit of $2 million of interest and debt for married couples and a lower limit for single individuals). Taxpayers should consult with their tax advisor regarding the specifics of this exception and they qualify.

Finally, I would be remiss to not mention loan modifications and the impact they may have on a tax bill. Rest assured, most loan modifications don’t create taxable income as they simply modify the terms of a loan to help a debtor better make his or her payments. However, if a lender actually reduces the principal amount of the loan, sometimes called a cram down, then the debtor better expect a 1099 for Cancellation of Debt Income and speak with a tax advisor.

Make sure your Tax Advisor knows how to apply correctly the tax deductions that are allowed.

In summary, if you going through a loan modification, short-sale, foreclosure, or deed in lieu, please know that, we at TaxCutters can help you through the tax paperwork process.  Please give us a call at: 773-728-1500.

The taxes alphabet

Taxes can be fun, accountant is a seerious word, but the tax preparation can be a lot of fun.

A is for Alimony

Alimony payments are deductible by the payer and taxable as income to the recipient. The deduction is “above the line” which means that you do not have to itemize to claim the deduction

B is for Barter.

The treatment of bartered goods and services is like accepting cash: the exchange of services is still reportable and taxable. You must include in gross income on your federal income tax return the fair market value of goods and services received in exchange for goods or services you provide.

C is for Capital Losses

When you sell or otherwise dispose of a capital asset, the difference between the amount you sell it for and your basis is a capital gain (if the value at disposition is more than your basis) or a capital loss (if the value of the disposition is less than your basis). You can only deduct capital losses on investment property, not on personal use property.

D is for Deductible Taxes.

If you itemize, you may be able to deduct state and local taxes; real estate taxes; foreign income taxes and property taxes on your federal income tax return. You may not deduct federal income taxes, Social Security taxes, Medicare taxes, FUTA (federal unemployment taxes), and RRTA (railroad retirement taxes).

E is for Educator Expenses.

If you are an eligible educator, you can deduct up to $250 of any unreimbursed expenses paid or incurred for books, supplies, computer equipment, other equipment, and supplementary materials used in the classroom; these expenses must be paid or incurred during the tax year

F is for FSA.

FSAs are flexible spending accounts. The most common FSA is a health flexible spending arrangement which allows you to pay qualified medical expenses from a fund set up with pre-tax dollars: withdrawals from the fund are income tax free.

G is for Gift Expenses.

Generally, if you provide an item to a customer (or a customer’s family) without an expectation of payment or compensation, that’s a gift. The IRS limits the amount that you can deduct for gifts: you can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year.

H is for Home Improvements.

In most cases, repairs to your home increase your basis for purposes of calculating a gain or a loss at sale, but your run of the mill home repair expenses – even if significant – are not deductible on your federal income tax return

I is for Injured Spouse.

You are an injured spouse if your share of your tax refund as shown on your joint return was, or is expected to be, applied against your spouse’s past-due federal debts, state taxes, or child or spousal support payments. If you are an injured spouse, you may be entitled to get your share of the refund released to you.

J is for Job Search Expenses.

If you itemize, you can deduct out of pocket expenses related to your job hunt even if you don’t get a new job.

K is for Kiddie Tax.

When income is unearned (generally, income from dividends and interest) for children under the age of 18, or under the age of 23 while a full time student, the first $950 is considered tax-free and the next $950 is taxed at the child’s rate. Unearned income over $1,900 is taxed at the child’s parents’ tax rate

L is for Levy.

One of the ways that the IRS works to make sure they get paid is the use of a levy. A levy is a legal seizure of your property.

M is for Making Work Pay Credit.

There is no Making Work Pay Credit for 2011. That also means no Schedule M.

N is for Non-Citizen Spouse.

Generally, a husband and wife cannot file a joint return if either spouse is a nonresident alien at any time during the year. However, if you were a nonresident alien or a dual-status alien and were married to a U.S. citizen or resident alien at the end of 2011, you may elect to be treated as a resident alien and file a joint return.

O Is For Offer in Compromise.

If you can’t pay your tax debt in full, you might consider an Offer in Compromise (OIC) which allows you to resolve your tax obligations for less than the full amount you owe.

P is for Penalty on Estimated Tax.

If you receive income without having any federal income taxes withheld, you should consider making estimated payments throughout the year to avoid any penalties.

Q is for Qualified Dividends.

For 2011, taxpayers who would normally have paid a 10% or 15% ordinary income tax rate will pay 0% on qualified dividends. All other taxpayers pay a mere 15%.

R is for Refund.

If you e-file and use direct deposit, you can receive your refund in as few as ten days.

S is for Standard Deduction.

For the tax year 2011, the standard deduction for single taxpayers or for those married filing separately is $5,800; for married taxpayers or qualifying widow(er)s, the standard deduction is $11,600; and for head of household, the standard deduction is $8,500.

T is for Tuition and Fees Deduction.

You may be able to deduct qualified tuition and related expenses of up to $4,000 that you pay for yourself, your spouse, or a dependent, as a tuition and fees deduction.

U is for Unreasonable Compensation.

S corporations must be sure that compensation paid to shareholders who are also employees is not unreasonable.

V is for Vacation Home.

Assuming that your vision of a vacation home and the IRS’ vision are similar enough, you can get a tax break or two on purchasing and owning a vacation home.

W is for Wash Sale.

A wash sale is, at its most basic, when you sell or trade stock or securities at a loss while simultaneously (or nearly simultaneously) buying something nearly identical.
For tax purposes, you generally cannot deduct losses from sales or trades of stock or securities in a wash sale.

X is for X-Mark (Signature).

No matter how thorough and accurate your tax return is, it’s not considered a valid return unless you sign it. If you are filing a joint tax return, your spouse must also sign.

Y is for Year End.

Y is for Year End. Tax returns are filed based on your tax year end. Individual filers have a calendar year which means that federal income tax returns are due on April 15 of each year – unless that day falls on a Saturday, Sunday or holiday as it does in 2012. This year, we have both (!) so returns are due April 17, 2012

Z is for Zero.

The general rule is that the more exemptions that you claim, the less in federal taxes is withheld. If you claim zero exemptions, the maximum amount of withholding will be taken from your check.

Please give us a call 773-728-1500 if you have any questions regarding your tax return, we the accountants in Chicago are here to help you!!