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.

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.

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.

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.

Now that you have filed your tax returns you may be wondering how long to retain the returns and the source documents. The Ohio Society of CPAs offers these guidelines for tax records and other important documents:

Copies of Tax Returns - Seven years.  You have seven years to go back and make a claim for a “worthless security”.  You will also need the returns and supporting documentation in the case of an audit.  Most audits will be conducted within three – six years of the filing date.  Note:  In the event you generate a Net Operating Loss (NOL) tax return copies need to be kept for up to 20 years.  An NOL can be carried forward for up to 20 years.

Cancelled Checks - If the cancelled check relates to supporting your tax return, then it should be included in your tax file for the periods discussed above.  Otherwise, cancelled checks and bank statements should be kept for three years.  It is advised that self-employed individuals should retain these records for six years.

Year-end Mutual Funds and Brokerage Statements - Three years.  Unless the statements are needed longer in order to establish your cost basis in the investment.

Loan Documents - Shred them when you pay off the loan and receive the title or deed.

Big Ticket Items - A special insurance file should be established to hold receipts of items such as, jewelry, rugs, appliances, antiques, cars, collectibles, furniture etc.  These will be needed to support your insurance claim in the event of a loss or damage.

Major Home Improvements - Receipts of major home improvements should be kept for as long as you own your home.  They may be needed for warranty purposes and allows you to show potential buyers how much you have invested in your home.

Keep Forever Documents - The following documents will be needed throughout your life time:

- Retirement documents.  Including your IRA contribution records.
- Stock and mutual fund purchases should be kept of as long as you hold that investment.
- Life Insurance policies should be kept until the policy terms are fulfilled.  Make sure your heirs know where to find policies that pay at the time of your death!
- Defined benefit pension plan documents should be kept even after you retire.
- Wills, Powers of Attorney, trust documents and similar documents will be needed to administer your estate.  Again, make sure your heirs know where to find these documents!

Hopefully these guidelines let you know what clutter in your home can now be shredded. 

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.

Aaaah……The week after tax season (and the first full weekend home in two and half months) is the best week in a tax accountant’s life!

We met a lot of new clients this year because of referrals from existing clients, and readers of our Tax Tip of the Week.  Thank you!  A referral is the best compliment we can ever receive.

Even though tax season is over—we will continue our Tax Tip of the Week mailing for the rest of the year.  We will keep you updated on the constant changes as well as spotlighting specific tax planning ideas.

If there are any special tax topics you would like us to cover, just send us an email or give us a call.

Again, thank you for making this one of most rewarding tax seasons yet.

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.

If you haven’t filed your tax return by now, you should probably consider filing for an extension.  It is a lot easier to file for an extension than it is to amend a return later for a mistake you made trying to rush your return to completion.  Even more costly is if the IRS finds a mistake you made and assesses underpayment penalties and interest.

To file for an extension, you simply need to submit Form 4868.   After submitting this form, you now have until October 15, 2012 to timely file your return.  Note, however, an extension of time to file is not an extension of time to pay.  If you suspect you will owe some taxes, you must send a payment along with the extension.  This is true for your federal, state, school district and city returns.

Ohio will automatically accept the federal extension.  Some cities, however, require a special city extension form.  Also, some cities will not allow extensions if you only have W2 income.  Be sure to check with your work and/or resident cities before April 17th.

Another reason to file for extension is that some speculate your chances for an audit decreases for extended returns.  How?  One of the methods the IRS uses to select a return for audit is to select a random sample of returns filed by April 17th.   If your return is not in that sample—then you don’t get picked!

Editor’s Note: One of the pledges I make to all my clients is that my personal return will be the last one filed each year. When my most procrastinating client’s return is filed on October 15th —-mine is right behind it!  And has been that way for nearly 20 years!

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 

…until next week. Tax Tip of the Week Video Series:

http://youtu.be/BlhqUiVEsJo

…until next week.

Generally speaking, the Ohio tax laws follow federal rules.  There are, however, several important differences you should know about.  This week, we will look at several of those differences. 

- Gambling Income:  On the federal return, if you itemize deductions, you can deduct gambling losses to the extent of gambling income.  On the Ohio return, there is no place to deduct gambling losses.  (Note:  if you pay taxes on gambling income to another state, make sure you file a non-resident return with that state so you don’t pay taxes on that income a second time to Ohio.  You will receive a credit for taxes paid to another state).   

- Social Security:  Depending on your income, as much as 85% of your Social Security income may be included in your federal taxable income.  In Ohio, any federal taxable Social Security income is not included in your Ohio taxable income. 

- United States Treasury Interest:  Interest, for example, from US Savings Bonds is fully taxable on your federal tax return.  That interest, however, is not included in your Ohio tax return. 

- Municipal Bond Interest:  In most cases, interest earned on tax-free municipal bonds is not taxable on the federal tax return.  However, it depends which state issued the municipal bonds whether or not the interest is taxed in Ohio.  If the bonds were issued in Ohio, it is not taxable.  If the bond was issued by a different state that interest income would be taxable. 

- Military Retirement Income:  Any retirement income you receive from serving as active duty military or in the reserves is generally taxable federal income.  A few years ago, Ohio now allows you to exclude that income on the state return.  (Note:  If you retired, for example, with 15 years of military service and 45 years of combined military and civilian service- a portion of the pension may qualify for exclusion on the Ohio return.  Call us if this applies to anyone you know).

 - Unsubsidized Health Insurance and Long-term Care Insurance (LTC) Premiums:  On the federal return, these insurance premiums are only deductible if they (and all other medical expenses) exceed 7.5% of your AGI.  Furthermore, the amount of deductible LTC premiums is determined by your age.  Ohio allows a full deduction of all unsubsidized health insurance and 100% of LTC premiums paid on the state return. 

- Political Contributions:  Amounts donated for political purposes are never deductible on the federal return.  Ohio does allow up to a $50 tax credit for donations made to candidates running for any state-wide office. 

These are just a few of the tax rules that make our state so special! 

Give us a call to discuss your state 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.

Rick Prewitt – the guy behind TTW

Tax Tip of the Week Video Series:

http://youtu.be/BlhqUiVEsJo

…until next week.

Rick Prewitt – the guy behind TTW

Tax Tip of the Week Video Series:

http://youtu.be/BlhqUiVEsJo

…until next week.

Rick Prewitt – the guy behind TTW

Tax Tip of the Week Video Series:

http://youtu.be/BlhqUiVEsJo

…until next week.