"The AMT and the 2007 Filing Season"

Although both the U. S. House of Representatives and the United States Congress have passed the AMT “patch” for 2007, the bills have yet to be reconciled.

The Senate-passed bill would leave a trillion-dollar hole in the federal budget over 10 years. The bill would spare the middle-class households touched by AMT an average of $2,000-per-family increase on 2007 income taxes and would ensure that refunds of as much as $75 billion would be distributed without delay.

The House-passed bill would be paid for mainly by forcing managers of private equity “buyout” firms and hedge funds to pay ordinary income tax rates on the millions of dollars they earn each year. Currently, much of those earnings are counted as capital gains and taxed at 15 percent, rather than at the 35 percent income tax rate paid by the nation’s highest earners.

What this all means to the tax professional:

The IRS is anticipating the AMT “patch” for 2007 however they cannot change the IRS programming for AMT until the act is passed and signed into law by President Bush.

After the law passes, the IRS will require a minimum of seven (7) weeks to reprogram their computers.

The challenge is to modify a program allowing some returns to be processed while restricting those returns which would be affected by the AMT.

Two potential options are:

1. Programming in stacking order to process returns that are unaffected by the AMT or

2. Not processing until the reprogramming is complete.

While IRS is uncertain of the date the legislation might pass as well as the particulars of the legislation, they are certain that:

the tax deadline of April 15 will not be extended.

Any potential delay will affect paper filed returns as well as e-filed returns.

The AMT was designed in the 1960s to prevent the very rich from using deductions, credits and other shelters to avoid paying taxes, but its income thresholds did not rise with inflation. Taxpayers are not hit by the AMT based on income alone. The number and type of deductions and credits they take also help determine whether they will be forced into the alternative taxation system. Because of rising incomes, the tax’s bite is expected to expand to more than 30 million households in 2010. Last year, the AMT affected 3.8 million mostly well-off households.

S. Raines, Sr. Financial Advisor/Tax Preparer

www.effectur.com

"Disabled Veteran Payments Ruled Tax-Free"

IRS Newswire [irs-newswire@lists.qai.irs.gov]

Certain Payments to Disabled Veterans Ruled Tax-Free;
Some May Be Due Refunds

WASHINGTON — Payments under the Department of Veterans Affairs (VA) Compensated Work Therapy (CWT) program are no longer taxable and disabled veterans who paid tax on these benefits in the past three years can now claim refunds, the Internal Revenue Service said today.

Recipients of CWT payments will no longer receive a Form 1099 from the Department of Veterans Affairs. Disabled veterans who paid tax on these benefits in tax-years 2004, 2005 or 2006 can claim a refund by filing an amended return using IRS Form 1040X. According to the VA, more than 19,000 veterans received CWT in Fiscal Year 2007.

The IRS agreed with a U.S. Tax Court decision issued earlier this year, which held that CWT payments are tax-free veterans’ benefits. In so doing, the agency reversed a 1965 ruling which held that these payments were taxable and required the VA to issue 1099 forms to payment recipients.

According to the VA, the CWT program provides assistance to veterans unable to work and support themselves. Under the program, the VA contracts with private industry and the public sector for work by veterans, who learn new job skills, re-learn successful work habits and regain a sense of self-esteem and self-worth.

Related Item: Revenue Ruling 2007-69

"The Luck of the Draw!"

I know lots of folks including friends and family members who gamble religiously. I’ve never actually been much of a gambler as my luck is between slim and none, but my friends have so much fun I’ve actually considered giving it a shot.

I've tried several different online sites, the occassional lottery ticket and of course, the office football pool. After some research, I’ve quickly discovered that there are about a zillion online gambling sites.

I decided to check out the IRS site to see what they have to say about gambling and taxes.

Gambling winnings are fully taxable and must be reported on your tax return. You must file Form 1040 (PDF) and include all of your winnings. Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and also the fair market value of prizes such as cars and trips. For additional information, refer to Publication 525, Taxable and Nontaxable Income.

A payer is required to issue you a Form W-2G (PDF) if you receive certain gambling winnings or if you have any gambling winnings subject to Federal income tax withholding. All gambling winnings must be reported irrespective as to whether any portion thereof is subject to withholding. in addition, you may be required to pay an estimated tax on your gambling winnings. For information on withholding on gambling winnings, refer to Publication 505, Tax Withholding and Estimated Tax.

You may deduct gambling losses only if you itemize deductions. Claim your gambling losses as a miscellaneous deduction on Form 1040, Schedule A (PDF). However, the amount of losses you deduct may not be more than the amount of gambling income you have reported on your return. It is important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses. Refer to Publication 529, Miscellaneous Deductions, for more information.

Think I'm gonna stick to those Friday night nickel and dime poker games with my girlfriends, and of course, the occassional lottery ticket. Like Kenny says, "you gotta know when to hold em and know when to fold em......."

S. Raines, Sr. Financial Advisor/Tax Preparer

www.effectur.com

Bush's Proposal to Congress on Mortgage Relief

Yesterday, President Bush unveiled his plan to help save the mortgage industry and homeowners facing foreclosure. Now remember, this is a plan that's been proposed to Congress.It's not law yet.

The Rev. Jesse Jackson, in a WSJ commentary says this will only help about 750,000 of the 6.5 million sub-prime borrowers.

And Barclays Capital says this will help only about 240,000 of the 2.9 million subprime adjustable rate mortgages that the Mortgage Bankers Association says exist.

Isn't the disparity in numbers fascinating?Where does Jesse Jackson get his figures?

And doesn't the Wall Street Journal verify numbers before printing them - even in editorials? (My Dow Jones editor verifies MY sources of information when I cite numbers.)

Regardless, there is some help out there. But for whom?

According to Liz Moyer in the Forbes article, "It also won't help the 16% of subprime borrowers who are already delinquent or in default, and it won't help millions of other homeowners who either will be deemed able to pay the higher rates when they adjust, starting in January, or who have the unhappy circumstance of having a house worth less than their mortgage or a loan that has already reset to the higher rates."

Is that entirely true? Well, according to the information on the White House's website, the plan is designed to help homeowners with otherwise good credit who are now delinquent in their payments because they couldn't afford the increases.

The other provision of the plan is to amend the Internal Revenue Code to avoid taxing the phantom income that arises from cancellation of debt, when these homes are foreclosed upon.

We'll have to wait and see how this plays out.

If you're in the affected group, I do urge you to contact your Senators and Representatives to pass legislation that can help you.

IRS Issues List of Vehicles that Qualify for the Alternative Motor Vehicle Credit

WASHINGTON — Purchasers of certain large trucks, buses or other heavy vehicles running on alternative fuel can claim a credit of up $32,000, and purchasers of certain large hybrid trucks and other heavy hybrid vehicles can claim a credit of up to $12,000 if they qualify for the Alternative Motor Vehicle Credit.

Qualified Alternative Fuel Motor Vehicles (QAFMV) are powered solely by alternative fuels, such as compressed natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen and any liquid at least 85 percent of the volume of which consists of methanol. Vehicles powered by a combination of an alternative fuel and a petroleum-based fuel may qualify for a reduced credit. Purchases of new vehicles with special equipment, as well as ones converted for alternative power, may qualify.

A credit also is available for certain new qualified heavy hybrid vehicles with a gross vehicle weight rating in excess of 8,500 pounds. A qualifying heavy hybrid motor vehicle draws propulsion energy from onboard sources of stored energy which are both an internal combustion or heat engine using consumable fuel, and a rechargeable energy storage system. This credit should be not confused with the alternative motor vehicle credit for qualified hybrid passenger automobiles and light trucks.

The list of vehicles is updated periodically

Words That Hurt!

Tax problems can refer to any type of problems taxpayers are having with the IRS (federal) or state tax authority. These problems may include garnishments, levies, liens, back taxes and interest owed, unfiled tax returns, unpaid business taxes, unpaid self-employment taxes, unpaid installment agreements, etc.

As tax season quickly approaches, I felt that there were some very important IRS terms and definitions that all taxpayers should become familiar with. When most taxpayers receive a letter in the mail from the IRS they open, read and toss it aside. The following terminology will give you an idea of just how deterimental ignoring those notices can become.

Abatement of Penalties: An abatement of penalties is a request to the IRS to remove certain penalties that were added to the taxpayer's account for a particular year or multiple years. The taxpayer is required to have reasonable cause that is specific for each year when submitting this request and must be able to explain why this reason should grant the penalties to be removed from their account.

Appeal: An appeal is the IRS's administrative process whereby taxpayers can contest decisions made by the IRS. It is also known as the Appeals Division.

Compliance: In order to be in full compliance, all taxes must be paid up to date and all returns required to file must be filed to date. Therefore, if submitting an OIC, IA or CNC (Status 53) for an individual, the taxpayer must have all estimated tax payments paid to date and returns filed. If submitting an OIC or IA for a business, the taxpayer must have paid all taxes for the past two quarters and filed all returns.

Currently Non-Collectible: Status 53 is also referred to as Currently Non-Collectible, Currently Uncollectible, or CNC. Status 53 allows taxpayers to make no monthly payments to their delinquent tax debt due to minimal income to provide for themselves and their family.

Discharge of Federal Lien: Authorized under the IRS Code. The process whereby the taxpayer or interested third party applies to have the federal tax lien removed from a specific piece of property or other asset. The discharge may be granted if, the IRS has no interest in the property, the IRS will receive the net proceeds from the sale of the asset, or the taxpayer has equity in other assets equal to 3 times the amount of the tax liability.

Garnishment: Legal process whereas a creditor (the IRS in this case) has obtained judgment on a debt (IRS back taxes or other debt) may obtain full or partial payment by seizure of a portion of a debtor's (taxpayer in this case) assets such as wages, bank account, etc. A garnishment is also commonly known as a levy.

Installment Agreement (IA): A mutual agreement between the IRS and a taxpayer to allow the taxpayer to pay their delinquent debt over a specified period of time.

Levy: A garnishment attached to a taxpayer's wages, bank account, account receivable, social security income, etc.

Lien: Whether a taxpayer does or does not own any property, IRS will issue a lien against their SSN to hinder them from purchasing, selling or transferring any property. A lien will effect their credit report. If the taxpayer is preparing an OIC and it is accepted, the lien will be released once the OIC payment terms have been satisfied. If not preparing an OIC, the lien will be released when the tax debt is either paid in full or the statute to collect the tax has expired. The Internal Revenue Code of 1986 provides for a statutory lien of the Federal Government to be filed for a tax debt after a proper assessment, notice and demand, and a neglect or refusal to pay. Liens can be discharged or subordinated under special circumstances. A Federal Tax Lien is formally recording in the appropriate public records office (county recorder, MENSE, Secretary of State (UCC) or US District Court) in order to establish priority over creditors, judgement lien creditors and other lenders.

Lien Discharge: Removal of a lien on a specific piece of property to allow for its sale or disposal.

Lien Release: Issued by the IRS when a tax debt is fully paid or if the taxpayer can prove they are suffering from a financial hardship and are unable to provide for their family's health and wellbeing.

Lien Subordination: To set aside a lien temporarily to allow for a sale or refinance.

Notice of Federal Tax Lien: Whether a taxpayer does or does not own any property, IRS will issue a lien against their SSN to hinder them from purchasing, selling or transferring any property. A lien will effect their credit report. If the taxpayer is preparing an OIC and it is accepted, the lien will be released once the OIC payment terms have been satisfied. If not preparing an OIC, the lien will be released when the tax debt is either paid in full or the statute of collection has expired. The Internal Revenue Code of 1986 provides for a statutory lien of the Federal Government to be filed for a tax debt after a proper assessment, notice and demand, and a neglect or refusal to pay. Liens can be discharged or subordinated under special circumstances. A Federal Tax Lien is formally recording in the appropriate public records office (county recorder, MENSE, Secretary of State (UCC) or US District Court) in order to establish priority over creditors, judgement lien creditors and other lenders.

Notice of Levy: A notice imposing and collecting a fine. When used in conjunction with IRS, this normally refers to the document that is served on a third party that attack wages, bank accounts, and other personal property.

Offer In Compromise: Code Section 7122 authorized the Commissioner or his delegate the authority to compromise most tax liabilities. An OIC is an agreement between the IRS and taxpayer that allows the taxpayer's delinquent tax debt to be compromised for less than the amount owed. The offered dollar amount is based on the taxpayer's net worth plus their future income potential.An offer in compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer's tax debt. The IRS has the authority to settle, or "compromise," federal tax liabilities by accepting less than full payment under certain circumstances. A tax debt can be legally compromised for one of the following reasons:

- Doubt as to Liability - Doubt exists that the assessed tax is correct.
- Doubt as to Collectibility - Doubt exists that you could ever pay the full amount of tax owed. - Effective Tax Administration - There is no doubt the tax is correct, and no doubt that the amount owed could be collected, but an exceptional circumstance exists that allows the IRS to consider a taxpayer's OIC.

To be eligible for a compromise on this basis, the taxpayer must demonstrate that collection of the tax would create an economic hardship or would be unfair and inequitable. The objective of the OIC program is to accept a compromise when it is in the best interests of both the taxpayer and the government, and promotes voluntary compliance with all future payment and filing requirements. Typically there is an application fee of $150.00 for the Offer in Compromise.

The IRS will accept an Offer in Compromise (OIC) when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. The ultimate goal is a compromise that is in the best interest of the taxpayer and the IRS. Acceptance of an adequate offer will also result in creating, for the taxpayer, an expectation of a fresh start toward complying with all future filing and payment requirements. The OIC process is based on a debt-to-asset formula devised by the IRS.

The Process - The OIC process is complex, time-consuming, and can take up to 18 months to resolve. Effectur relies on the client to provide detailed financial information required by the IRS. The IRS will not consider an OIC if the client-submitted documents are more than three months old. In addition, the client must be in compliance (all taxes must be filed and quarterly estimated payments, if applicable, have to be current).

Reasonable Collection Potential: The total realizable value of the taxpayer's assets plus any future income. The total is generally the minimum Offer in Compromise amount.

RCP Equation:
Total Income - Total Expenses = MDI (Monthly Disposable Income)
MDI x FIP Factor (Future Income Potential) = Future Income
Future Income + Equity in Assets = RCP

Refund Statute Expiration Date: A taxpayer may request a refund of an overpayment within three years from the time the return was filed or within two years from the time the tax was paid, whichever is later. If no return was filed by the taxpayer, the claim must be filed within two years from the time the tax was paid (IRC 6511(a)).

Statute of Limitation: The IRS has set specific time periods before expiration of certain actions (i.e. to collect a tax, make an assessment to an account, to request a refund, to file bankruptcy, etc).

Subordination of Federal Tax Lien: The legal process whereby the IRS will subordinate its Federal Tax Lien to a third party by temporarily setting aside the lien to enable a refinance or sale of a piece of property. Normally the IRS must determine that it is in its best interest to subordinate, which translates into, "What are we going to get out of this?"

Substitute for Return: If a taxpayer has not filed a return and the IRS feels it can collect from the money earned, an IRS Revenue Officer may file a SFR. When a SFR is filed, the agent lists all of the income reported to the IRS for that year, but only gives the taxpayer one exemption and only the standard deduction (i.e. nothing is itemized). Even if for the past 10 years the taxpayer has itemized, the IRS prepares the return in their favor. If the taxpayer has children the IRS tries to file the return based on the information from the previous years (i.e. married filing joint with 2 children), but IRS will only file this way if they have previous returns showing this info.

In summary, there are lots of companies that will offer tax help, but true tax debt help is not just setting up payment plans. Tax resolution firms can intercede on your behalf with the IRS to help solve your tax debt problems.

S. Raines, Sr. Financial Advisor/Tax Preparer

"Those Disappearing Deductions...Use em or lose em!"

One of the most popular tax breaks set to disappear at the end of 2007 involves state and local sales taxes. If you itemize your deductions, you have the option of deducting your state and local taxes instead of your state and local income taxes. This provision benefits many people and more than 11.4 million taxpayers claimed this sales-tax deduction for 2005.

Older taxpayers can take advantage of a charitable giving provision, which is set to expire on December 31, 2007. If you are age 70 ½ or older you can transfer up to $100,000 directly from an individual retirement account, IRA, to a qualifed charity without having to pay income tax on the distribution. This transfer counts toward your required minimum distribution as well as assists you with estate planning.

For 2007 but set to expire on December 31, 2007 is the deduction for mortgage insurance. It does not apply to mortgage insurance contracts issued before 2007 and it begins to phase out once your adjusted gross income exceeds $100,000 or $50,000 for married people filing separately.

Deductions for higher education tuition and fees and a credit for certain energy efficient home improvements are also set to expire this year. The tuition deduction is taken as an adjustment to income not requiring taxpayers to itemize their deductions to claim. The tuition deduction applies only to the actual cost of tuition and fees and does not include books, supplies, etc. The Hope and Lifetime learning credit are the only education credits where you can itemize books and supplies.

At the end of 2007 the $250 per educator for the cost of books, computer equipment and other classroom supplies they pay out of their own pockets is an adjustment to income for elementary and secondary school teachers and other qualified educators. More than 3.5 million taxpayers took this deduction for 2005. To be eligible, you must be a kindergarten through grade 12 teacher, instructor, counselor, principal or aide for at least 900 hours during a school year.

It is advisable to review your investment portfolio, focusing on stocks, bonds sor mutual fund shares that are selling for less than you originally paid for them or for the basis you have in the investment. If you have been thinking of disposing of the investment, before the end of the year may be the perfect tax time.

Capital losses on the sales of such investments can offset realized capital gains. If your losses exceed your gains, or you did not have any gains for 2007, you can deduct as much as $3,000 a year from your wages and other ordinary income. The limit is $1,500 for married couples filing separately. Any unused loss can be carried forward into future years until loss is used or depleted.

You will want to watch for transactions called “wash sales” which typically happens when you sell a security at a loss and, within 30 days before or after the sale, you buy the same thing or something “substantially identical”. If you discover you did participate in a wash sale, you cannot deduct your loss. However, the disallowed loss on the transaction is added to the cost of the newly acquired security and the result is an increase in the basis of the new security.

Much tax savings can be obtained by fully participating in retirement plans available from your employer such as a 401(k) or 403(b) plan. Check with the human resources department where you work to see if you are participating at the maximum level and certainly to the extent the employer will match your contributions.

Seniors who continue to have earnings after age 70 ½ can contribute to a Roth IRA. You would be required to have a modified adjusted gross income below $156,000 on a married filing joint tax return or $99,000 for single taxpayers in order to make a full contribution of $4,000. The $4,000 could be supplemented by an additional $1,000 as a “catch up” contribution.

One of the more problematic tax issues arises when a taxpayer endeavors to be in business and the business is not profitable. The question that immediately surfaces is whether the loss created was done with a profit motive or was the activity engaged in as a hobby.

Hobby income is reported as “other income” on the taxpayer’s personal income tax return. Hobby related expenses are limited to the amount of hobby income and are claimed as a miscellaneous itemized deduction, deductible only by the amount exceeding 2 percent of the taxpayer’s adjusted gross income. It is normally believed that an activity is carried on for profit if it is profitable in three of the last five years, extended to two of the last seven years in the case of horse breeding, showing, training or racing activities.

Last, but certainly not least, never attempt to do your own return if you have complicated issues that you do not feel comfortable preparing yourself. Taxpayers find themselves needing tax debt help and having to hire tax resolution firms to assist them. It is always the best policy to be proactive rather than reactive.

S. Raines, Sr. Financial Advisor/Tax Preparer

www.effectur.com