Do You Wear the Pants in Your Family?

You might think so, but the IRS has the final say during tax season. The most grossly abused and misunderstood filing status on tax returns are individuals and even married couples who think that they qualify for the Head of Household status. Just being the head of your house or wearing the pants in the family does not necessarily qualify you for head of household status.

Generally, to qualify for head of household status you must be unmarried (single or legally separated), and not be eligible to file as a qualifying widow or widower, and have a dependent child. You must also have provided more than half the cost of maintaining, where you live as your main home for a qualifying dependent (generally a blood relative or adopted child).

You may also qualify if you are legally separated and your spouse was not a member of the household during the last six months of the tax year. You must have provided more than half of the cost of maintaining a household (main home) for a child who is a qualifying dependent.

A major problem faced by the IRS is when both separated parents claim head of household and both claim the child(ren). If a multiple support agreement exists, then the spouse listed in the agreement takes precedent. In the case where there is no agreement, the one maintaining the home will be granted the status. Both will be notified by the IRS to provide proof. School address records are the most fool-proof evidence of support.

There are special rules for claiming your parent(s) as a dependent(s). If your parent is a qualifying dependent, you may be eligible to file as head of household even if they do not live with you. However, you must be able to claim an exemption for them. Also, you must pay more than half the cost of keeping up their home. If the parent has no filing requirement and the only income that they receive is a minimal amount of Social Security, go ahead and claim them, even if you aren’t filing head of household. The IRS is hoping that you won’t since it would be considered a lost exemption. Lost exemptions save the IRS money and not you. If the parent is in a rest home or nursing home situation and you are paying a major portion of the costs, claim them and use the status if you are eligible. If you and your siblings are sharing support, take turns in claiming them.

Another important thing to remember is that U. S. citizens with a nonresident alien spouse are considered unmarried and cannot claim head of household. The IRS does not recognize the spouse as a qualifying dependent since they do not have their U. S. citizenship.

As most Baby Boomers can attest, prior to 1970, Head of Household meant the man of the house or the husband. This is evident with published census records which always listed the head of household as the husband. Recent Census Bureau statistics have proven this to no longer be true.

Amazingly, single parent demographics show that the percentage of children with single parents rose from 23% in 1980 to 31% in 2002. Here are some eye-opening statistics on the single family household:

· 26% of U. S. children under the age of 18 years old live in a single-parent home (Archived at: http://www.census.gov/prod/2005pubs/p70-104.pdf).

· 4.4 million is the number of U. S. male-maintained family household with no wife present. That’s 4.2 percent of all households. (Archived at: http://www.census.gov/prod/2005pubs/censr-20.pdf.

· 12% of U. S. family households are female-maintained with no husband present. That hasn’t changed for the past 15 years (Archived at: http://www.census.gov/prod/www/statistical-abstract.html.

· 4% of U. S. family households are male-maintained with no wife present – a one percent increase since 1990 (Archived at: http://www.census.gov/prod/www/statistical-abstract.html.

In 2006 the IRS began a strict enforcement of the Earned Income Credit and head of household status. A large majority of EIC filers are also claiming head of household status. The enforcement policy was enacted to stop the overwhelming nationwide abuse. Remember, this branch of the federal government has access to all public and private (financial institutes, banks, etc.) records and can easily verify your living arrangement. If audited and found to have erroneously filed, your social security number could be flagged for an indefinite period, and even though you may quality, you would not be allowed to claim either. The audit can also mean the assessment of penalties, interest and the repayment of any refunds received. These assessments far exceed any reduction in liability or refund you may have been trying to achieve. You may find yourself having to contact a tax resolution firm for tax debt help to negotiate payment plans or help release an IRS levy (What to do if you receive a Levy Notice) or to prevent garnishments.

Gentlemen, you can keep your “social standing” and wear the pants in your household but remember, Uncle Sam is not “gender specific” on who wears those pants when filing.

S. Raines, Sr. Tax Advisor/Preparer

Does the IRS have a "Blind-Eye" for Federal Employees?

The Senate Finance Committee found in April that more than 450,000 federal employees and retirees owe back federal taxes (totaling about $3 billion), including almost 5 percent of the employees and retirees of the U. S. Tax Court. [U. S. Senate Committee on Finance (press release), 4-25-07].

Tax Advocate groups and Tax Protestors are having a field day with this issue. With the IRS cracking down on middle class American's tax debt, it appears to me that there is a double standard with the IRS.

Spreadsheets obtained by Washington, D.C., radio station WTOP under the Freedom of Information Act show that hundreds of thousands of government employees failed to file a tax return for the 2005 tax year. No federal agency was exempt, though "tax compliance" varied from one agency to another.

Seventy-one employees in the Executive Office of the President, which includes the White House, owe $664,527 in taxes for 2005. Approximately 20 of those employees have entered into an IRS payment plans, bringing the EOP balance down to $455,881 owed by 50 employees.

"In the past, IRS officials have been quick to compare the federal workers' rate of compliance with the general public's. But this year, the IRS is not able to track the compliance rate for the general public." - WTOP

Documents proved that one-third of the employees, or 149,500, entered into payment plans with the IRS. The United States Postal Service was the highest level of noncompliance, and the Treasury Department had the lowest level.

The IRS enters into a contract with new employees that make it a requirement to keep their 1040 filings and payments current or it is automatic grounds for discharge. If the IRS does not enforce the provisions of their own employment contracts, how can they expect and pressure taxpayers to enter into payment arrangements. Instead, they issue an IRS Levy, Garnishment and even attach personal property?

As a veteran Tax Advisor/Preparer, I have seen how the IRS deals with delinquent filers/payers.....smells like double standards and a "blind-eye" to me!

S. Raines

Senior Tax Preparer/Advisor

Effectur, Inc. (www.effectur.com)

Avoiding the 1099 Cancelled Debt Trapp

The rate of debt charge-off and mortgage forgiveness has increased dramatically in 2007. If a federal government agency, financial institution, or credit union cancels or forgives a debt you owe of $ 600 or more, you will receive a Form 1099-C, Cancellation of Debt. A debt includes any indebtedness for which you are liable or which attaches to property you hold. The IRS mandates that you must claim this amount as income on your taxes because you never paid it back- thus making it income. However if you "settle" this debt as "paid in full" (i.e., credit cards payoffs) with the creditor make sure you ask that they agree to the settled in full arrangement and not send the remainder as a loss to the IRS. If the creditor willingly accepts "less than" as "full payment" then make sure they agree not to report remainder. The creditor can refuse but usually does not.

If any interest is forgiven and included in the amount of canceled debt in box 2, the amount of interest will also be shown in box 3. Whether or not you must include the interest portion of the canceled debt in your income depends on whether the interest would be deductible if you paid it.

Certain student loans contain a provision that all or part of the debt incurred to attend the qualified educational institution will be canceled if you work for a certain period of time in certain professions for any of a broad class of employers. You do not have income if your student loan is canceled after you agreed to this provision and then performed the services required.

An example of excluded debt which is not considered as canceled debt in your gross income includes anydebt is canceled in a bankruptcy case under title 11 of the U.S. Code. See Publication 908, Bankruptcy Tax Guide or if you are deemed insolvent. However, you cannot exclude any amount of canceled debt that is more than the amount by which you are insolvent.

Credit card industry facts and personal debt statistics (2006-2007):

Market share ranked by major card type: 1. Visa - 54 percent; 2. MasterCard – 29 percent; 3. American Express – 13 percent; 4. Discover Card – 4 percent (Source: Cardweb)

Did you know………..

• The first widely accepted plastic charge card was issued in 1958 by American Express.
• The first general use credit card that allowed balances to be paid over time was the BankAmericard (which later changed its name to Visa in 1977), issued in 1959 (Source: PBS Frontline; American Express, Visa USA)
  
• The average interest rate across all existing credit card accounts was 13.46 percent as of May 2007 (Source: Federal Reserve)
  
• There were 984 million bank-issued Visa and MasterCard credit card and debit card accounts in the U.S in 2006 (Source: Visa USA, MasterCard International)

Now let’s look at another example of a cancellation of debt, the dreaded 1099-A (Acquisition or Abandonment of Secured Property). Let’s say the bank foreclosed on your home in 2007. The resulting debt-forgiveness income was not exempt because you were not “insolvent or bankrupt”, then you must report the forgiveness as taxable income on your 2007 Form 1040. As a result you have a balance due on your 2007 Form 1040.

In reading the various tax blog discussions on the subject of home foreclosures and resulting debt forgiveness, tax law professor, Jim Maule of MAULED AGAIN provides an excellent description of the situation in his post “Greed, Stupidity. Poor Judgment and Taxes”; “The recent downturn in the housing market, a predictable and predicted outcome of the rampant speculation in housing fueled by speculators and gamblers bored with the stock market and looking for something more exciting, more profitable, or more instantaneous, has created serious financial problems for homeowners who overreached when purchasing or investing in residential real estate. Those problems include not only loss of the home through foreclosure but higher federal and state income tax liabilities because the foreclosure can generate cancellation of indebtedness income.”In simpler terms - families who wanted to buy a home that they could not afford found lenders willing to give them a mortgage with a minimal down payment, a low interest rate, and small monthly payments for an initial limited period (i.e. Adjustable Rate Mortgage). When this initial limited period passed and it was time to refinance the mortgage housing prices had dropped – so that the principal balance on the loan was more than the market value of the home – and interest rates had gone up. The overextended families could not afford the new monthly payments and the lenders had to foreclose on the properties.In many situations the borrowers and lenders reached agreements so that portions of the mortgage debt were “forgiven” by the lenders. This debt forgiveness can result in taxable income to the borrower. Here’s a very simplified example. You borrow $20,000 and default on the loan after paying back $5,000. If the lender is unable to collect the remaining debt from you and writes off the loan, there is a cancellation of debt of $15,000, which generally is taxable income to you.The proposed Mortgage Cancellation Tax Relief Act of 2007 would amend the tax code to forgive debt cancellations on primary residences and is currently before the House Ways and Means Committee, the primary tax legislation body of Congress. The bill would permanently exclude from tax liability any mortgage debt on a principal residence that is forgiven following a foreclosure or renegotiation with lenders – providing homeowners affected by the nationwide sub-prime mortgage crisis with $2 billion in tax relief.

Jim Maule has wisely pointed out that “The bottom line is that the proposed tax relief doesn’t prevent the foreclosure, doesn’t put the people back into their homes, and doesn’t do much to help them straighten out the mess that their lives have or will become because of the misguided decision to bite off more financial responsibilities than their means would permit them to chew.”Relief already exists for most of the lower-income taxpayers. Debt cancellation on foreclosure is not taxable to the extent that you are insolvent. That is, to the extent that your liabilities (the money you owe) exceeds the value of your assets (the value of what you own). For tax purposes you are considered insolvent if after reducing your total original liabilities by the amount of debt cancelled your total outstanding debts still exceed the value of your assets. .
You claim this relief on IRS Form 982(Reduction of Tax Attributes Due to Discharge of Indebtedness). All you have to do is check the box at Line 1(b) in Part I and indicate the amount of debt forgiveness that is exempt from federal income tax on Line 2. You attach the Form 982 to your Form 1040 for the year in which the debt has been cancelled. Although most Americans seem to be avoiding the credit card trap, they are not dodging the adjustable mortgage traps; there are still plenty of people on the financial edge.Consider these statistics:

• More than a third -- 36% -- of those who owe more than $10,000 on their cards have household incomes under $50,000, according to the VIP Forum analysis.
• 13% who owe that much have household incomes under $30,000. The percentage of disposable income used to pay debts is still near record highs.
• The median value of total outstanding debt owed by households rose 9.6% between 1998 and 2001.
• Bankruptcies set another record in 2003, with 1.6 million personal filings, the American Bankruptcy Institutereports.

All of that is more than enough evidence to suggest that a large number of people are overdosing on debt. An excellent example of relief from the stress of such financial burdens is to contact InCharge Debt Solutions (http://www.incharge.org), a nonprofit organization who is devoted to personal financial health. They provide professional credit counseling, education and resources to help those burdened with too much debt regain financial health without a loan or bankruptcy.

If you are concerned about the tax implications of a 1099-A or 1099-C, you may also be interested in speaking with IRS Tax Resolution firms such as Effectur, Inc. (www.effectur.com). Firms like these generally offer free telephone tax consultations.

Educate yourself and get the facts before you sign for that high interest credit card or adjustable rate mortgage loan. If you bite off more than you can chew or default, Uncle Sam will be waiting just around the corner to get his fair share.

SHARON RAINES

SR. TAX ADVISOR/PREPARER