Hold On to Your Tax Returns

by NFS | Oct 25, 2015 | Archives

You should always keep a copy of your tax return for your records. You may need copies of your filed tax returns for many reasons. For example, they can help you prepare future tax returns. You’ll also need them if you have to amend a prior year tax return. You often need them when you apply for a loan to buy a home or to start a business. You may need them if you apply for student financial aid.

If you can’t find your copies, the IRS can provide a transcript of the tax information you need or a copy of your tax return. Here’s more information, including how to get your federal tax return information from the IRS:

• Transcripts are free and you can get them for the current year and the past three years. In most cases, a transcript includes the tax information you need.
• A tax return transcript shows most line items from the tax return that you filed. It also includes items from any accompanying forms and schedules that you filed. It doesn’t reflect any changes you or the IRS may have made after you filed your original return.
• A tax account transcript includes your marital status, the type of return you filed, your adjusted gross income and taxable income. It does include any changes that you or the IRS made to your tax return after you filed it.
• You can order your free transcripts online, by phone, by mail or fax at this time.
• The IRS has temporarily stopped the online functionality of the Get Transcript application process on the IRS.gov website that delivered your transcript immediately. The IRS is making modifications and further strengthening security for the online service. While you can still use the Get Transcript tool to order your transcript, the IRS will send it to you via mail to the last address we have on file for you.
• To order your transcript online and have it delivered by mail, go to IRS.gov and use the Get Transcript tool.
• To order by phone, call 800-908-9946 and follow the prompts.
• To request an individual tax return transcript by mail or fax, complete Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript. Businesses and individuals who need a tax account transcript should use Form 4506-T, Request for Transcript of Tax Return.
• You should receive your transcript within five to 10 days from the time the IRS receives your request. Please note that ordering your transcript online or over the phone are the quickest options.
• Keep in mind that the method you used to file your return and whether you have a refund or balance due affects your current year transcript availability.
• If you need a copy of your filed and processed tax return, it will cost $50 for each tax year. You should complete Form 4506, Request for Copy of Tax Return. Mail the request form to the IRS address listed on the form for your area. Copies are generally available for the current year and past six years. Allow 75 days for delivery.

Mortgage Applicants. If you are applying for a mortgage, most mortgage companies only require a
tax return transcript for income verification purposes, which can be obtained through the IRS IVES (Income Verification Express Service) program. If you need to order a transcript, please follow the process described above and have it mailed to the address that the IRS has on file for you. Please plan accordingly and allow for time for delivery.

Disaster Victims. If you live in a federally declared disaster area, you can get a free copy of your tax return. Don’t hesitate to call the office if you need more information about disaster relief information.

Financial Aid Applicants. If you are applying for financial aid, you can use the IRS Data Retrieval Tool on the FAFSA website to import your tax return information to your financial aid application. The temporary shutdown of the Get Transcript tool does not affect the Data Retrieval Tool. You may also click on their help page for more information.

If you need a copy of your transcript you should follow the information above to request it as soon as possible. It takes 5 to 10 calendar days for transcripts to arrive at the address the IRS has on file for you.

Identity Theft Victims. Did you receive a notice from the IRS about a suspicious return? Has the IRS notified you that it did not accept your e-filed return because of a duplicate Social Security Number? If you answered yes to either question, then you may be a victim of tax-related identity theft. If you are a tax-related identity theft victim you first need to file the Identity Theft Affidavit. If you are waiting for the IRS to resolve your case but need a transcript, you will need to call the IRS Identity Protection Specialized Unit at 800-908-4490 to process your request.

If you’ve been a victim of identity theft, help is just a phone call away.

Lending Money? Make it a Tax-Smart Loan

by NFS | Oct 22, 2015 | Archives

Lending money to a cash-strapped friend or family member is a noble and generous offer that just might make a difference. But before you hand over the cash, you need to plan ahead to avoid tax complications down the road.

Let’s say you decide to loan $5,000 to your daughter who’s been out of work for over a year and is having difficulty keeping up with the mortgage payments on her condo. While you may be tempted to charge an interest rate of zero percent, you should resist the temptation. Here’s why.

When you make an interest-free loan to someone, you will be subject to “below-market interest rules.” IRS rules state that you need to calculate imaginary interest payments from the borrower. These imaginary interest payments are then payable to you and you will need to pay taxes on these interest payments when you file a tax return. Further, if the imaginary interest payments exceed $14,000 for the year, there may be adverse gift and estate tax consequences.

Exception: The IRS lets you ignore the rules for small loans ($10,000 or less), as long as the aggregate loan amounts to a single borrower are less than $10,000 and the borrower doesn’t use the loan proceeds to buy or carry income-producing assets.

In addition, if you don’t charge any interest, or charge interest that is below market rate (more on this below), then the IRS might consider your loan a gift, especially if there is no formal documentation (i.e. written agreement with payment schedule) and you go to make a nonbusiness bad debt deduction if the borrower defaults on the loan–or the IRS decides to audit you and decides your loan is really a gift.

Formal documentation generally refers to a written promissory note that includes the interest rate, a repayment schedule showing dates and amounts for all principal and interest, and security or collateral for the loan, such as a residence (see below). Make sure that all parties sign the note so that it’s legally binding.

As long as you charge an interest rate that is at least equal to the applicable federal rate (AFR) approved by the Internal Revenue Service, you can avoid tax complications and unfavorable tax consequences.

AFRs for term loans, that is, loans with a defined repayment schedule, are updated monthly by the IRS and published in the IRS Bulletin. AFRs are based on the bond market, which changes frequently. For term loans, use the AFR published in the same month that you make the loan. The AFR is a fixed rate for the duration of the loan.

Any interest income that you make from the term loan is included on your Form 1040. In general, the borrower, who in this example is your daughter, cannot deduct interest paid, but there is one exception: if the loan is secured by her home, then the interest can be deducted as qualified residence interest–as long as the promissory note for the loan was secured by the residence.

If you have any questions about the tax implications of loaning a friend or family member money, don’t hesitate to call.

When A Loved One Dies…

by NFS | Oct 20, 2015 | Archives

In order to relieve loved ones of additional stress, anxiety and expense at the time of a death in the
family, consider recording as much information as possible in advance and providing copies to family members. Using our When a Loved One Dies Life Guide, you’ll be able to record and share the following information:

• Names and contact information of your professional advisors.
• Your vital statistics.
• Your specific funeral instructions.
• Historical information for your obituary.
• People and organizations to be notified about a death.
• Locations of vital documents.
• Important banking and insurance information.
• Your wishes for the disposition of personal property.
• Any special requests and/or instructions.

In addition, this Life Guide provides information and suggestions on the actions to take immediately following a death in the family, as well as in the days, weeks and months to follow.

Click here for your free copy of the “When a Loved One Dies” Life Guide.

Is Canceled Debt Taxable?

by NFS | Oct 19, 2015 | Archives

Generally, debt that is forgiven or canceled by a lender is considered taxable income by the IRS and must be included as income on your tax return. Examples include a debt for which you are personally liable such as mortgage debt, credit card debt, and in some instances, student loan debt.

When that debt is forgiven, negotiated down (when you pay less than you owe), or canceled you will receive Form 1099-C, Cancellation of Debt, from your financial institution or credit union. Form 1099-C shows the amount of canceled or forgiven debt that was reported to the IRS. If you and another person were jointly and severally liable for a canceled debt, each of you may get a Form 1099-C showing the entire amount of the canceled debt. Give the office a call if you have any questions regarding joint liability of canceled debt.

Creditors who forgive $600 or more of debt are required to issue this form. If you receive a Form 1099-C and the information is incorrect, contact the lender to make corrections.

If you receive a Form 1099-C, don’t ignore it. You may not have to report that entire amount shown on Form 1099-C as income. The amount, if any, you must report depends on all the facts and circumstances. Generally, however, unless you meet one of the exceptions or exclusions discussed below, you must report any taxable canceled debt reported on Form 1099-C as ordinary income on:

• Form 1040 or Form 1040NR, if the debt is a nonbusiness debt;
• Schedule C or Schedule C-EZ (Form 1040), if the debt is related to a nonfarm sole proprietorship;
• Schedule E (Form 1040), if the debt is related to non-farm rental of real property;
• Form 4835, if the debt is related to a farm rental activity for which you use Form 4835 to report farm rental income based on crops or livestock produced by a tenant; or
• Schedule F (Form 1040), if the debt is farm debt and you are a farmer.

Exceptions and Exclusions

If you’ve had debt forgiven or canceled this year and receive a Form 1099-C, you might qualify for an exception or exclusion. If your canceled debt meets the requirements for an exception or exclusion, then you don’t need to report your canceled debt on your tax return. Under the federal tax code, there are five exceptions and four exclusions for tax year 2015. Here are the five most commonly used:

Note: The Mortgage Debt Relief Act of 2007, which applied to debt forgiven in calendar years 2007 through 2014, allowed taxpayers to exclude income from the discharge of debt on their principal residence. Up to $2 million of forgiven debt was eligible for this exclusion ($1 million if married filing separately) and debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, also qualified for the relief. As of this writing, Congress has yet to reauthorize the Act for calendar year 2015.

1. Amounts specifically excluded from income by law such as gifts, bequests, devises or inheritances – In most cases, you do not have income from canceled debt if the debt is canceled as a gift, bequest, devise, or inheritance. For example, if an acquaintance or family member loaned you money (and for whom you signed a promissory note) died and relieved you of the obligation to pay back the loan in his or her will, this exception would apply.
2. Cancellation of certain qualified student loans – Certain student loans provide that all or part of the debt incurred to attend a qualified educational institution will be canceled if the person who received the loan works for a certain period of time in certain professions for any of a broad class of employers. If your student loan is canceled as the result of this type of provision, the cancellation of this debt is not included in your gross income.
3. Canceled debt, that if it were paid by a cash basis taxpayer, would be deductible – If you use the cash method of accounting, then you do not realize income from the cancellation of debt if the payment of the debt would have been a deductible expense. For example, in 2014, you obtain accounting services for your farm using credit. In 2015, due to financial troubles you are not able to pay off your farm debts and your accountant forgives a portion of the amount you owe for her services. If you use the cash method of accounting you do not include the canceled debt as income on your tax return because payment of the debt would have been deductible as a business expense.
4. Debt canceled in a Title 11 bankruptcy case – Debt canceled in a Title 11 bankruptcy case is not included in your income.
5. Debt canceled during insolvency – Do not include a canceled debt as income if you were insolvent immediately before the cancellation. In the eyes of the IRS, you would be considered insolvent if the total of all of your liabilities was more than the FMV of all of your assets immediately before the cancellation. For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account). Here’s an example. Let’s say you owe $25,000 in credit card debt, which you are able to negotiate down to $5,000. You have no other debts and your assets are worth $15,000. Your canceled debt is $20,000. Your insolvency amount is $10,000. Because you are insolvent at the time of the cancellation, you are only required to report the $10,000 on your tax return. 

If you exclude canceled debt from income under one of the exclusions listed above, you must reduce certain tax attributes (certain credits, losses, basis of assets, etc.), within limits, by the amount excluded. If this is the case, then you must file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the amount qualifying for exclusion and any corresponding reduction of those tax attributes.

Exceptions do not require you to reduce your tax attributes.

Questions? Don’t hesitate to contact our office if you have any questions about whether you qualify for debt cancellation relief.

Social Security Amounts for 2016

by NFS | Oct 16, 2015 | Archives

The Social Security Administration has announced the new amounts for 2016.  Due to the CPI index factors for this past year, the gross Social Security benefits do not have an increase for 2016.  Even though benefits do not change for 2016, some of the other limits do change.  Here is the information for 2016:

The amount of earnings subject to Social Security taxes remains at $118,500.

The amount of earnings required to be subjected to Social Security taxes in order to receive a quarter of coverage increases to $1,260 (up from $1,220 for 2015).

Earnings limitations for taxpayers who have not reached full retirement age (before having to repay Social Security benefits) remains at $15,720 ($1,310/month).

Earnings limitations for taxpayers who reach full retirement age in the current year (before having to repay Social Security benefits) remains at $41,880 ($3,490/month). (“Full retirement age” is age 66 for those born in 1943-1954.)

The amount of the SSI Federal Payment Standard remains at $733/month.  For a married couple this remains at $1,100/month.  The SSI Student Exclusion Limits remains at $1,780/month with the annual limit remaining at $7,180.

The Substantial Gainful Activity earnings increase to $1,130/month for non-blind disabled recipients while the blind disabled recipient amount remains at $1,820/month.  The Trial Work Period earnings increase to $810/month.

The full Fact Sheet can be found on Social Security’s web site www.socialsecurity.gov.

Fall Financial Tidbits

by NFS | Oct 1, 2015 | Archives

Summer has come to an end. Now that the hottest days, family vacations and back-to-school rush are behind us, it’s a great time to give some attention to your personal finances. Prepare for the coming months – and the holidays on the horizon – with these fall tips:

• Pay quarterly estimated taxes. If you’re self-employed or you have extra income you haven’t reported on your W-2, now’s the time to make sure you’re paying both state and federal quarterly estimated income taxes so you don’t get stuck with a big bill from Uncle Sam in April. September 17th was the deadline to pay your third quarter estimates, but don’t let that stop you from sending something in anyway.
• Prepare for the cooler months. Although you may still have summer on your mind, staying warm gets expensive when winter hits. Many utility companies offer “budget billing” plans that allow you to spread your heating costs over the year while avoiding a surprisingly large bill for a particularly cold month. Also, winterizing your home this fall conserves energy and saves money.
• Start saving for the holidays. It may sound excessive to start thinking about the holidays in October, but Christmas is a less than 90 days away. Now is a great time to create a holiday spending plan. For instance, if you plan to spend $300 on gifts, you should start saving $3-4 per day to get there. Stashing away cash in advance allows you to buy gifts for everyone on your list without taking on debt. Resolve to start a “Christmas Club” savings account in the New Year to jump-start your savings habit.
• Teach children to save. When kids return to school, they often have a renewed sense of focus and determination. Schools across the country are incorporating financial literacy into the classroom. Take this opportunity to talk to your children about money and the importance of saving. Your efforts will be rewarded as your child develops an understanding of financial principles and positive financial habits. We have a great FREE guide entitled “Money Doesn’t Grow on Trees…Teaching Kids About Money”. Please feel free to request one by clicking here.
• De-clutter and donate. As summer winds down and you start spending more time inside, take a hard look at all the stuff you’ve been stockpiling. Sorting through clothes you no longer wear along with electronics and unused household items can free-up space and even make you a little cash. Sell items at a local consignment shop or donate them (by making a tax-deductible contribution).
• Conquering the Clutter in your Financial Closet. You need only to keep credit card receipts, ATM transactions, and deposit and debit card receipts until you verify the transaction on your monthly statements and then you can shred them. Always remember that any financial transaction, receipt or account statement should be shredded. NEVER throw them in the trash.

PERMANENT items you may want to keep:

• Educational records
• Employment records
• Health records
• Retirement and Pension Plan information
• Contents of your safe deposit box

CURRENT items, which need to be reviewed every 3-6 years, before deciding whether to continue keeping or shredding them include:

• Cancelled checks
• Bank statements
• Insurance policies
• Home purchase, repair and improvement records
• Warranties
• Income tax records