Forrest says..."Stupid is as stupid does!"

We are all guilty of doing "stupid" things with money, whether it's buying something we know that we absolutely can't afford or don't need, or "assuming" that we have the money in our checking account when we don't (cha-ching hear those bank fees soring).

I was browsing through some tax related websites and found one that absolutely made me go "what the *&^% were they thinking!".

Dave Ramsey has a website which has short snipit stories of the stupid things that people do with money. It's called "STUPID TAX - Tell Us Your Story". He invites folks to write in and give their stories. Makes you wonder who would voluntarily want to admit to some of these "oops moments".

He also provides some great resources to help you "not" make stupid mistakes with money. Here's a suggestion, use some of that money to get budget or credit counseling.

I highly recommend that you take a minute and read a few of these stories and see how you rate on the "STUPID MONEY SCALE". You might be better off than you think!.

Remember my favorite saying, "It's better to be proactive than reactive!"

S. Raines, Sr. Financial Advisor/Tax Preparer

Tax bill too big? IRS offers payment options

If this year's tax filing deadline will be a "pay" day for you and you don't have the cash, the Internal Revenue Service gives you several payment options.

In this tax tip: • Paying with plastic • Installment plans • Let's make a deal

First, even if you can't pay your tax bill, go ahead and file your return on time. This way you'll avoid the IRS's failure-to-file penalty of 5 percent per month (up to a maximum of 25 percent) of your balance due. You'll still face the failure-to-pay penalty each month your bill is outstanding, but it's only 0.5 percent of the amount you owe.

Paying with plastic

Now take a look at what you owe.

Some taxpayers find they can pay part or all of their tax bill by putting it on a credit card. The IRS has awarded contracts to two companies to accept credit card charges: Official Payments and Link2Gov. Both accept payments from electronic as well as paper filers, either via phone or the Internet. They take American Express, Discover, MasterCard or VISA.

Credit card tax payment processors

Link2Gov Corp. (888) PAY1040 (888) 729-1040 Pay1040.com Official Payments Corp. (800) 2PAYTAX (800) 272-9829 Officialpayments.com

Remember, however, that while this may get you off the hook with Uncle Sam, it will cost you in other ways. Each company has its own fee schedule (generally 2.49 percent of your tax bill or a minimum $1) connected with charged payments.

And if you don't pay off your credit card in full, you'll start racking up interest charges on your account. In some cases, however, your credit card interest charges might come to less than IRS penalties and interest you'd owe if you don't pay on time. So before you decide to pay with plastic, run the numbers so that you don't pay anyone, neither Uncle Sam nor your credit card company, any more than necessary.

Installment plans

If your tax bill is too large for a credit card, the IRS is willing to take monthly payments. You even get to pick your monthly payment amount and the day it will be due.

In fact, if you've previously filed (and paid) taxes on time, your tax bill is less than $10,000 and you convince the IRS that you can't come up with that much all at once, the agency can't turn down your request. Your installment plan, however, must pay off the due tax in at least three years. To get the program going, attach Form 9465, Installment Agreement Request, to the front of your tax return.

Financially strapped taxpayers also have the option of using an installment plan to make partial payments of tax liability. The IRS had previously allowed partial installment payments but stopped the practice in 1998 when an IRS attorney raised questions about the IRS's authority to accept such payments without statutory authority. Congress officially granted the IRS the power to resume partial payment installment agreements as part of the American Jobs Creation Act of 2004.

While the IRS argued for legislative reinstatement of the partial-payment option, approval is not automatic. Taxpayers who request a partial-payment installment agreement must provide detailed financial information, including data on equity assets, that the IRS will verify. Plus, the IRS will review the arrangement every two years to determine whether the taxpayer's financial status has changed, and if it has improved, the amount of installment payments could increase or the agreement could be terminated.

Regardless of whether you pay your tax bill in full or partially via an installment agreement, keep in mind that paying over time, even to Uncle Sam, will cost you more. The IRS charges a one-time fee of $105 unless you make arrangements to have your installment payments made via direct debit from your bank account.

The fee drops to $52 for direct debit agreements. Some lower income taxpayers might be able to pay a reduced fee of $43, which was the previous user fee for all installment agreement applicants. The rate increase took effect in 2007.

You'll be billed for any fee with your first payment. Plus, penalties and interest continue to accrue to your unpaid tax bill. The IRS may also file a federal tax lien against you, which will be released when you pay off your installment loan.

If you want to apply for an installment arrangement, the IRS now accepts online applications.

Let's make a deal

What if you can't pay off your tax bill, in whole or part, in three years or five years or ...? Then it may be time to negotiate.

The IRS might be willing to accept an offer in compromise, or an OIC; a lump-sum payment you offer to make that is less than the total amount of tax you owe. In these cases, the agency hopes to get some taxpayer money sooner than it would after years of costly collection efforts.

The key here is that the amount must reasonably reflect your ability to pay. It's not merely haggling to get your tax bill reduced. In fact, the IRS is stepping up its efforts to weed out those taxpayers who use the offer-in-compromise route merely to delay paying their bills. Since Nov. 1, 2003, any taxpayer making a reduced payment offer has had to include a $150 application fee with the request. The agency hopes this means that it will hear only from folks who truly need the negotiated bill.

Once a tax lien has been assessed by the IRS, most taxpayers find that they are need of the services of a reputable tax resolution service to help them reduce their liability and possibly have the lien removed. Once you have entered into a payment arrangement with the IRS.....please, please make you payments timely therefore reducing the possibility incurring additional costs of hiring a firm for help.

The IRS will review your financial situation and future income potential to determine whether your offer is appropriate. Be warned, however. Uncle Sam says this program was designed only for extreme cases and very few filers will qualify for the program under the terms they would like. If you believe your situation does indeed meet the requirements, you need to file two forms: Form 656, Offer in Compromise, and Form 433-A, Collection Information Statement.

You must also submit the $150 application fee along with Form 656-A, Offer in Compromise Application Fee Instructions and Certification. (The fee is waived for filers who have little or no income. They can claim a poverty exception when they file Form 656-A.) If you don't send this form along with your fee, the IRS will return your offer application "without further consideration." If you submit everything as required, and the IRS determines you do not meet the qualifications and rejects your offer, you are out $150. But if the agency accepts your offer, your fee will go toward your new payment amount.

Then the IRS wants even more upfront. Your offer must include a 20 percent payment for lump sum cash payment offers or your first installment payment if you're seeking a periodic payment plan.Regardless of which tax bill-payment method you choose, make your decision now. Delay will only compound your financial and tax problems. And try to pay something. By sending in any amount when you file your return, at least you'll ultimately reduce your interest and penalty charges.

S. Raines, Sr. Financial Advisor/Tax Preparer

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