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A Recent Tax Court Case….Tax Tip of the Week | No. 148 May 30, 2012

Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , add a comment

Deduct Interest on Home Never Built 

In a recent court case (TC Summ OP. 2011-17) the Tax Court allowed an interest deduction for a house that was never built.  A married couple took out a loan and bought a beachfront home, tore it down and planned to build a new house on the site.  However, they could not do so until a state environmental agency granted them a permit.  That process dragged on for two years.  By that time, the local real estate market had crashed and the couple couldn’t get a loan to cover the construction costs, so they sold the land at a loss. 

Tax rules state that mortgage interest is deductible on a loan for 24 months after construction begins or for 24 months after the teardown date.  The court ruled that deducting interest on a loan for a home under construction doesn’t condition deductibility on the house’s completion.  And in this case, the home was never built because of unforeseen circumstances that were well beyond the couple’s control.  Therefore, a mortgage interest deduction was allowed on the original acquisition loan.

The rule that disallows a mortgage interest deduction after the 24-month period ends remains as nondeductible personal interest.

Do you have any mortgage interest questions?  

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

Tax Tip of the Week Video Series:

http://youtu.be/BlhqUiVEsJo

…until next week.

 

A New Definition of Bankruptcy Rules… | Tax Tip of the Week | No. 147 May 23, 2012

Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , add a comment

File Your Tax Returns!

The IRS Office of Chief (legal) Council provided a clarified interpretation of income tax debt discharged in bankruptcy.  The IRS and the courts have determined that tax debts may be discharged in bankruptcy in the past, but in this determination, they held that individual income tax debts do not qualify for discharge.

In summary, late filers who are in financial difficulty must file a tax return to discharge debt in bankruptcy before the IRS assesses tax.

Example 1:  Dave has not filed his 1040’s for several years.  He is now in financial trouble, but has NOT received any assessment notices from the IRS.  Dave now files his returns reflecting $30,000 in unpaid taxes.  These debts MAY be dischargeable if they meet the other bankruptcy discharge rules.

Example 2:  Joe has not filed his 1040’s for several years.  He is now in financial trouble and HAS received an assessment notice from the IRS for $40,000.  Joe now files his tax returns reflecting $30,000 in unpaid taxes.  These tax debts may NOT be discharged in bankruptcy because the returns were filed after the IRS assessed the tax.

If you have any questions on this give us a call and we will refer you to an attorney—we can’t practice law! 

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

Tax Tip of the Week Video Series:

http://youtu.be/BlhqUiVEsJo

…until next week.

 

A Look at “Cancellation of Debt” Income | Tax Tip of the Week | No. 146 May 16, 2012

Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , 2comments

So, You Think You Are Out of Debt?

In these difficult financial times and declining home values, we have helped numerous clients navigate the tax issues of Cancellation of Debt (COD).  A COD is created when a taxpayer sells their home in a short sale (sales price is less than the mortgage amount), has a property foreclosed upon, or settles a credit card debt for an amount less than the current balance.

What most people don’t realize is that the IRS considers COD taxable income.  The lender will issue a 1099-C to let the IRS know that a COD has occurred.  Credit card companies in particular are very lax in informing their card holders that COD is taxable income.

Fortunately, the Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from a COD if the debt is on their principal residence.  Also, the COD income could be excluded if discharged in a bankruptcy procedure.

Important Notice – The COD exclusion for primary residences will expire 12/31/2012.  At this time, we have no clue if Congress will extend this provision of the tax code.  Homeowners could still be on the hook even if the house is sold but the bank does not formally forgive the remaining balance of the loan in a letter.  The bank must officially sign off in writing before December 31, 2012.

If the COD occurs on a second home, a rental property, or a reduction of a credit card balance, then the taxing implications can only be reduced if the taxpayer can prove insolvency.  Insolvency is proven by completing a worksheet like the one found on page six of Publication 4681 .  On a worksheet like this, you must list all assets and liabilities at the time of the COD.  The COD income can then be excluded from taxation only to the extent of the insolvency (the amount that debt exceeds assets).

This Tax Tip is only a very brief overview of a very complicated piece of the tax code and should not be relied upon for every situation.  We strongly urge you to call us if you know of anyone in this situation.  It may also be advisable to consider a short sale of a primary residence now due to the uncertainty of the 2013 tax laws.

As always, give us a call if you have any questions.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

Tax Tip of the Week Video Series:

http://youtu.be/BlhqUiVEsJo

…until next week.

 

“Check Them Out” Before You Write a Check | Tax Tip of the Week | No. 145 May 9, 2012

Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , add a comment

Qualified Charitable Database

Have you ever wondered if the group that you donated money to is a qualified charitable organization that makes your donation tax deductible?

The IRS recently made a database available to check them out. Here, you can search the listings by entering the organization’s name, employer identification number, or state.  The IRS will update the data on qualifying groups every month.

While you can safely assume a donation to the Salvation Army or the American Red Cross (for examples) are qualified charities, you may sometimes want to donate to other noble causes as well.  Now you can make sure your donation qualifies for a tax deduction.

Also, don’t forget to receive written substantiation of your donation from any group that you give $250 or more.  You should also save cancelled checks for any donations less than $250. 

As always, give us a call if you have any questions. 

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

Tax Tip of the Week Video Series:

http://youtu.be/BlhqUiVEsJo

…until next week.

 

Behind on Your Ohio Taxes? | Tax Tip of the Week | No. 144 May 2, 2012

Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , add a comment

Ohio Announces a Tax Amnesty Program

From May 1, 2012 – June 15, 2012 the State of Ohio will allow you to pay any unpaid Ohio taxes and waive all penalties and half of the interest of any balance due amounts. 

Covered taxes include individual income, individual school district income, commercial activity, sales and seller’s use, employer withholding, school district withholding and estate taxes. 

To learn more about the details of this program visit www.ohiotaxamnesty.gov

Unfortunately, the amnesty program does not include any taxes for which a bill, notice of assessment or audit has been issued. 

If you owe the state money, this six week window would be a good time to come forward. 

Give us a call if you have any state tax issues. 

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

Tax Tip of the Week Video Series:

http://youtu.be/BlhqUiVEsJo

…until next week.