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Posted in Foreclosures and Short-Sales on Aug 17, 2011

Originally published in the Pacific Grove Hometown Bulletin

August 17, 2011

Foreclosures and Short-Sales - Part V - Insolvency

The last four issues I went over the basic concepts of foreclosures and short-sales, an overview of ways to exclude the resulting taxable income, the effects of recourse/nonrecourse debt, and the principal residence exclusion. If you missed these articles they are re-published on my website at www.tlongcpa.com/blog. This issue I will specifically discuss the exclusion available when you are insolvent.

Insolvency means your liabilities are greater than the fair market value of your assets -essentially you have a negative net worth. In such cases, the IRS may allow you to exclude cancellation of debt income, created as a result of losing a home or rental property, to the extent that you are insolvent. This insolvency calculation is performed based on your assets and liabilities the moment before your debts are discharged.

Let us assume you are losing a second home with recourse loans so the principal residence exclusion does not apply to you. You have a house worth $300,000 and the value of everything else you own - cars, savings, retirement plans, household items, etc. is $100,000 for a total of $400,000 in assets. Then assume your home loan was $550,000 and you have you have $50,000 in credit card debt and car loans for a total of $600,000 in liabilities. You are insolvent by $200,000. If your home was foreclosed, you would have cancellation of debt income of about $250,000. You can exclude $200,000 of the $250,000, from income, leaving you with only $50,000 of taxable income.

When calculating your insolvency, do not forget to include the fair market value of pension plans, annuities, etc. If you have a plan such as CalPers, for instance, that pays you a monthly retirement benefit, you need to call your plan administrator and ask for an actuarial calculation of the value of your plan. Some people are surprised to learn that that pension can easily be worth $500,000 or $1,000,000, and would drastically change your insolvency calculation!

After determining how much debt can be excluded, you then have to reduce any tax attributes you may have. In exchange for excluding the $200,000 of income as in the above example, you then have to reduce or eliminate tax benefits that may have been useful to you in the future, or defer tax to a later date through basis reductions in items you may sell later. There is a specific order, method, and timing for doing this, but items such as carryovers of net operating losses, general business credits, minimum tax credits, and capital losses; basis in depreciable and nondepreciable property; passive activity loss carryovers and foreign tax credit carryovers are all on the chopping block. If after all these rules are applied and you still haven't traded enough to equal your exclusion, then you are off the hook!

Oh, and you still have to calculate the gain or loss on the disposition of the property. We will not discuss that in this issue.

It is possible for the insolvency exclusion to be used in conjunction with other exclusions, and there are ordering rules to the exclusions themselves. This is just a summary of some of the key provisions. There are many other circumstances and specific rules that could affect you, and you need to consult with a qualified professional to review your situation. Consult as soon as you can foresee the possibility of losing a home in order to plan the most tax efficient way to lose it.

If this exclusion does not help you completely, and you are losing a rental property, you may be eligible for the qualified real property business indebtedness exclusion - next issue's topic!

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950. He can be reached at 831-333-1041.

Last Updated by Travis H. Long, CPA on 2011-08-17 11:45:01

Posted in Foreclosures and Short-Sales on Aug 02, 2011

Originally published in the Pacific Grove Hometown Bulletin

August 3, 2011

The last three issues I went over the basic concepts of foreclosures and short-sales, an overview of ways to exclude the resulting taxable income, and the effects of recourse/nonrecourse debt. If you missed these articles they are re-published on my website at www.tlongcpa.com/blog. This issue I will specifically discuss the exclusion available to people losing a principal residence.

Due to the tsunami of defaults anticipated when the markets began to fall in late 2007, Congress enacted the Mortgage Forgiveness Debt Relief Act on December 20, 2007 which resulted in an additional exclusion in IRS Code Section 108 trying to help people going through short-sales, foreclosures, or mortgage reductions on a principal residence. There is a lot of incomplete and incorrect tax advice that floats around regarding this exclusion - not only from water-cooler talk and media blurbs, but from ill-trained tax preparers as well.

As discussed in my previous articles, cancelled debt on recourse loans is taxable income to you. The Qualified Principal Residence Indebtedness exclusion allows you to exclude the resulting income if the home was your principal residence (you can only have one and it is determined by facts and circumstances) subject to limitations. One of the common oversights is not understanding that only "qualified" debt is eligible for the exclusion. Generally speaking, this is the original debt to purchase or construct the property as well as debt subsequently obtained to improve the property (such as additions or remodels). If you refinanced your home to get cash out, and used the money for a new car, vacations, for a down payment on another home or rental property, education, to pay down other debts, or to pay your living expenses or even the mortgage on your home, or anything else - none of this is qualified for the exclusion. Yikes! In addition there are different Federal and California limits for how much qualified debt you can exclude. Any amount you cannot exclude will be taxable as ordinary income to you unless you can qualify for another exclusion.

Any amount you can exclude reduces your cost basis in the home. When the home is sold or the bank forecloses, you also have to calculate your gain or loss on the disposition. If you bought the home shortly before prices fell significantly, chances are that even with the basis reduction, the sales price will be less than your cost basis resulting in a nondeductible personal loss. (In a foreclosure the "sales price" is the fair market value of the home when foreclosed.) In cases where the calculation results in a gain, you may be able to exclude the gain, or part of the gain per Section 121, if you lived in the home for two out of the last five years.

If your loan was nonrecourse, you do not have cancellation of debt income, but you still have to calculate the gain/loss on disposition. Unfortunately, the "sales price" in these cases is the amount of debt outstanding when the home was disposed - and not the low, actual sales price (or fair market value if foreclosed). This can create taxable gains, but Section 121 may help you here as well.

This is just a summary. There are many other circumstances and specific rules that could affect you, and you need to consult with a qualified professional to review your situation. Consult as soon as you can foresee the possibility of losing a home in order to plan the most tax efficient way to lose it.

If this exclusion does not help you completely, you may be eligible for the insolvency exclusion - next issue's topic!

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Last Updated by Travis H. Long, CPA on 2011-08-02 17:42:52

Posted in Foreclosures and Short-Sales on Aug 02, 2011

Originally published in the Pacific Grove Hometown Bulletin

July 20, 2011

Foreclosures and Short-Sales - Part III - Recourse and Nonrecourse Debt

The last two issues I went over the basic concepts of foreclosures, short-sales, and an overview of excluding the related income and what you give up in return. If you missed these articles they are re-published on my website at www.tlongcpa.com/blog. This issue I was intending to discuss the exclusion available to people losing their principal residence, but I am going to bump that to the next issue in order to cover one other fundamental concept - recourse and nonrecourse debt.

Recourse debt means that you are personally liable for the debt and the lender has the right to pursue you for the full balance of what you owe if the home is not enough to satisfy the debt you owe. Nonrecourse debt means the lender has agreed, in event of default, to take the house as full settlement for the debt, and they cannot pursue you for the amount you are deficient. This effectively means there is no debt for them to cancel, which means you can have no taxable income from cancelled debt. Clearly, you hope your debt is nonrecourse! How do you know?

Actually, if you have never refinanced your property, it is almost certainly nonrecourse. Hooray! This is due to the California anti-deficiency laws in California Code of Civil Procedures Section 580(b) which essentially makes it illegal for lenders to pursue borrowers for a deficiency on original purchase loans. Unfortunately these same provisions do not apply if you refinanced, and you will almost always find those loans to be recourse. Un-hooray.

Even with a recourse loan, it is rare to hear of lenders pursuing the deficiency because they do not find it particularly cost effective (think legal fees) or good press to sue someone who just lost a home and has a family to support with no job. It is often simpler for the lender to cancel the debt, take a loss, and write-it off as a bad debt on their tax returns.

There are two tax documents you may receive in the process of losing a property through foreclosure or short-sale. A 1099-A is a tax notification that you have given up or "A"bandoned the property. The other document is a 1099-C which should be issued if the lender "C"ancels a recourse debt. Both of these include the lender's idea of its fair market value and if you are personally liable. Both are notoriously incorrect assuming you receive them at all. The 1099-C also includes the amount of debt you owed when cancelled. A savvy tax professional will recognize these issues can affect your taxes and will help you take appropriate action. If you have a foreclosure or short-sale looming, get help early.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950. He can be reached at 831-333-1041.

Last Updated by Travis H. Long, CPA on 2011-08-02 17:39:35

Posted in Foreclosures and Short-Sales on Jul 12, 2011

Last Updated by Travis H. Long, CPA on 2011-08-02 17:29:13

Posted in General on Jun 23, 2011

Originally published in the Pacific Grove Hometown Bulletin

June 15, 2011

Foreclosures and Short-Sales - Part I - Overview

Over the past three years I have been involved with approximately 80 foreclosures and short-sales.  Ultimately, it is a combination of strong tax and legal advice that will help you safely navigate these troubled waters.  The stakes are high, the rules are complex, and we have no roadmap for future audits on these transactions.   The common thread I have seen is that each foreclosure or short-sale is surprisingly unique and there is no one-size-fits-all approach to handling them successfully.  Let's start with an overview...   

In a foreclosure, you stop paying the loan and the bank eventually repossesses the home and sells it.  In a short-sale, you find a buyer, but the buyer will not offer enough for you to pay off the loan you owe.  So you go to the bank and say, "Hey, I found someone willing to pay this much.  I know it is short of the amount I owe you, but will you let the sale proceed, and let me off the hook for the rest?"  These processes can take anywhere from three to 15 months from my experience, and in the end, most short-sales fail to materialize.  Another animal, deed -in-lieu of foreclosure, is where you voluntarily give the home back to the bank in exchange for cancelling your debt obligation.  A deed-in-lieu of foreclosure is rarely seen in California (zero out of my 80) because it does not absolve the bank of the junior lien holders on the property.  Liens can be tricky to find and the bank does not want to get stuck with your other debts.

I am often asked which is better for credit scores and future ability to buy a home.  I cannot tell you for sure - it depends on a lot of factors, but generally I think a short-sale is better for a lot of people (not all).  Whether it is a short-sale or foreclosure, credit scores will be impacted significantly - maybe 200-300 points.  With credit counseling you can typically rebuild it substantially in two to three years.   Your future ability to buy a home will often depend on the loan program (FHA, VA, conforming loan, jumbo, etc.) and how much money you can put down.  At this point, the best advice is to plan on three to seven years for foreclosures and two to seven years for short-sales (although I have heard less).  Given the vast number of people losing their homes, I tend to think banks will become more lenient than in the past.  I also think they will reward people who worked to accomplish a short-sale.

From a tax perspective, the big problem with these transactions is that they can create potentially taxable income...and a lot of it!  The reason for this is quite simple - by cancelling your debt, the bank effectively gave you money to pay off your loan.  Just as lottery winnings are taxable, so is debt that is cancelled.  Fortunately, the IRC also contains sections which allow you to exclude the income.  Next issue I will start discussing your tax options.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950.  He can be reached at 831-333-1041.

Last Updated by Admin on 2011-06-23 16:04:57

Posted in General on Jun 07, 2011

Originally published in the Pacific Grove Hometown Bulletin

June 1, 2011

National Debt

Last issue, I concluded that tax rates are likely to rise if you look at the historical relationship between tax brackets and macro-economic events.  Despite an economic climate indicating that higher tax rates are needed, we are pretty much witnessing the lowest tax rates since before World War II or the Great Depression depending on which end of the bracket spectrum you lie.  These two forces have compounded to magnify our national debt to $14 trillion.

You hear a lot about the national debt, but so what?  Have you ever personally felt affected by it? Has the government ever asked you to ante up $165,000 for your share as a family of four (or $800,000 if you include enough to ensure the promises made for future obligations will be met as well)?  I think we as Americans are blasé on the subject because we do not connect the dots back to ourselves.  It often seems distant or a problem for someone else in another time.  This may not be the case. 

We have set the stage for doubt.  The strength of our financial system is largely built on the belief that the U.S. will make good on its borrowed money.  If large debt holders begin to doubt this for economic or malign political reasons, the mental atmosphere about the stability of the U.S. could change quickly.  It would likely send us and the rest of the world into a global depression that would be painfully felt by all.  The U.S. would struggle with a collapsing currency, inflation, unemployment, and irate nations from around the world that watched their investments in the U.S. evaporate.

David Walker, the former U.S. Comptroller General feels our biggest threat to national security is not terrorism, but our own fiscal irresponsibility.  Walker left the G.A.O. in 2008 to run the newly formed Peter G. Peterson Foundation (www.pgpf.org) because he felt his warnings had little impact in the political arena.  He has since left to start a similar organization - Comeback America Initiative. 

Peter G. Peterson, founder of The Blackstone Group ? a financial services company, created the Peter G. Peterson Foundation with $1 billion of his profits after the 2007 IPO of The Blackstone Group.  The purpose of the foundation is to educate America about the urgency of the fiscal challenges threatening our future, and working towards solutions.  The foundation funded a critically acclaimed full-feature movie released in theaters across the nation in 2008, I.O.U.S.A., (available on Netflix), and a five-part follow up, I.O.U.S.A.: Solutions in 2010.  A shortened version of the movie and the follow-up can be viewed at www.iousathemovie.com.

I encourage you to watch.  It is fascinating and will leave you with an enlarged perspective.  We can overcome this challenge, but we have to act, and we need to act as soon as possible.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950.  He can be reached at 831-333-1041.

Last Updated by Admin on 2011-06-07 11:14:08

Posted in General on May 19, 2011

Originally published in the Pacific Grove Hometown Bulletin

May 18, 2011

Are Tax Rates on the Rise?

Earlier this week, I pulled out my crystal ball and posed a few questions about future personal federal income tax rates - strangely, it became suddenly murky.  So I pulled out my history books instead and drew some conclusions.  Let me set the stage and give you some history.  Keep in mind since 2003 our bottom tax bracket has been 10 percent and our top tax bracket has been 35 percent. 

Wars have historically been fantastic reasons to raise taxes.  In fact, our first national income tax was created to raise money for the Civil War.  After the Civil War the tax was abolished.  Although income taxes were permanently revived in 1913 (some people still questioning its legitimacy from their prison cells) a logical pattern seemed to develop? when our country needed money, tax rates went up; when it did not need money, tax rates went down. 

In 1913 the bottom bracket was at 1 percent and the top bracket was at 7 percent ? perhaps a special introductory rate. During World War I the bottom bracket moved as high as 6 percent and the top bracket shot up to 77 percent!  Then brackets fell dramatically until the depression in the 1930s.  The government needed money so brackets shot back up flowing right into World War II where they peaked in 1944 and 1945 with the bottom bracket at 23 percent and the top bracket (income over $200K) at 94 percent!  Rates dropped after World War II, but stayed relatively high with the bottom bracket not dipping below 14 percent and the top bracket not dipping below 70 percent until after 1980. 

During the Reagan and H. W. Bush years dramatic changes took place (Reaganomics).  The bottom bracket dropped as low as 11 percent and the top bracket dropped as low as 28 percent.  The brackets rose a little during the Clinton years and then dropped again when W. Bush took the reigns. 

Tax brackets are not everything, but to the extent they are an indicator, it is difficult to say we are overtaxed.  With the exception of a three year period in the late 1980s, the tax rates on our bottom and top tax brackets are both at their lowest levels since before World War II.  We have maintained this course during our worst economic decline since the 1930s while simultaneously fighting a war and spending at all-time highs.  Our logical pattern seems to have been broken.  Our national debt has been rising substantially to pay for our record-low tax brackets and our loose wallet.  The longer we as Americans continue to cast our vote beyond our means the more painful it will be. 

So from my perspective, tax rates only have one direction to go ? up.  Next issue, I will discuss the national debt.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950.  He can be reached at 831-333-1041.

Last Updated by Admin on 2011-05-19 12:37:09

Posted in General on May 05, 2011

Originally Published in the Pacific Grove Hometown Bulletin

April 6, 2011  

Filing an Extension 

Imagine opening a letter from the IRS assessing you an $18,000 penalty because they claim you did not file your extension on time!  I once worked with a client that was faced with this exact problem.  The irritating part is that an extension request is an arguably meaningless filing since it is automatically granted if requested. Nonetheless, the IRS takes it seriously. 

So with April 18th fast approaching (taxes are not due on the 15th due to the federal observation of the signing of the Compensated Emancipation Act by Abraham Lincoln in 1862), how can you protect yourself?  If you are filing your own extension for your personal tax returns with the IRS use Form 4868.  Be sure to get some kind of proof of delivery and make a copy of the extension.  Even with delivery confirmation it is difficult to prove what you sent.  The best way is to e-file the extension through home-use tax software or by using a tax professional that e-files and obtains an electronic confirmation.  What about California?  In the midst of a tiresome sea of nonconformity with the IRS, I applaud California for this one act - you need not file a form to be granted an automatic extension! After you have filed your federal extension you have until October 15, 2011 (six months) to file your returns. 

BEWARE!!  Just because you file an extension does not grant you additional time to pay!  The tax you calculate on the return you are going to prepare and file by October is still due by April 18.  So if you think you might not have enough tax withheld, you need to make some good estimates and send in some checks.  You may want to hire a tax professional to help with this calculation.  You can send the federal check with Form 4868.  For California, you can use FTB Form 3519 to send with your check.  There are also electronic options for paying both of these. 

If you do not pay your tax or file your return on time, interest and penalties are calculated based on any amount of tax you come up short. Interest varies with market changes (currently 4 percent a year for the IRS). IRS late payment penalties are ½ percent of the balance each month (up to 25 percent).  If you fail to timely file, the IRS penalties are 5 percent of the balance each month (up to 25 percent).  You may also incur underpayment of estimated tax penalties depending on your circumstances.  California interest and penalties are similar or higher. 

Oh, and remember my client with the $18,000 penalty - fortunately we were able to successfully petition to get the penalty waived!       

Travis H. Long, CPA is located at 706-B Forest Avenue, PG.  Travis can be reached at 831-333-1041. 

____________________________________________________________________________

Lost in Transition 

Originally Published in the Pacific Grove Hometown Bulletin

March 16, 2011

Lost in Transition

In my experience in the tax profession and from my vantage point as a Certified Public Accountant, I can tell you stories that will make your heart sing.  I can also tell you stories that will make you shudder like you just heard a bad contestant on American Idol.  The stories that make you cringe are usually caused by moments of stupidity by other tax preparers, or sadly, by people losing at a game of Tax Return Russian Roulette1.  I like to think the stories of hearts singing involve me riding in on a metaphorical white horse to save the day, heralding a banner "To correct stupidity and promote safety locks on roulette guns." I grant you, it is an unusual banner.

If I may spare you some pain, dear reader, I would say be mindful of transitions between tax preparers (including yourself) ? particularly if you are "downgrading" the type of preparer you use.  Over the years I have seen countless returns where valuable tax attributes from prior returns were not carried forward to the next year's returns by a new preparer (effects ranging from hundreds to several hundred thousand dollars in tax).  Some of you may be under the impression that your tax returns each year are distinct; this is rarely true.

Let us look at a simple example and suppose that you bought or inherited some mutual funds in 2007 worth $11,000; you sold them in 2009 for $6,000 resulting in a $5,000 loss.  There is a good chance you would have been limited to using $3,000 of this loss in 2009 and the other $2,000 would have been a capital loss carryover to your 2010 returns that could save you $500 or more in tax.  Of course, if you switch preparers and the new preparer does not have the training or presence of mind to find the Schedule D from 2009 and look for any unused capital losses, the cost of your new tax preparer just went up by $500.  Sadly, you probably would never know a costly mistake was made.

There are many areas similar to the above item including: carryovers of net operating losses, basis in retirement contributions and depreciable assets, state tax payments or refunds, office-in-home expenses, charitable contributions, rental property expenses (passive activity losses), alternative minimum tax (AMT) credits, foreign tax credits, general business credits, etc.  Often there are different amounts for the federal and state returns, and perhaps even AMT amounts for each of those if you are or may become subject to AMT.  Unfortunately these are scattered throughout forms in the return, and just because your new preparers show you comparative figures in a tax summary when you pick up your returns, does not mean they entered any of the carryovers in their software.

You do not have to be rich or have a complicated return to be affected by a number of these.  However, it does generally hold true, that the more money you make and the more types of activities you are involved with (rental properties, investments, etc.) the more heavily you are affected.

If you are doing the returns yourself with tax software for the first time, look carefully through the returns for hints of the above mentioned items, and be very diligent in answering the tax software questions.  Also, be wary of deleting items you think you no longer have, as they may have carryover or suspended items attached to them.  One of your big challenges is to know what the returns are supposed to look like when you are through.  If you are switching preparers, make sure the new preparer is qualified.  You may want to ask what specific carryover information was picked up from the old returns.

Let it be said of you, "You have chosen, wisely."  I hope I do not have to saddle up my white horse on your behalf, as I still prefer a regular appointment.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950.  He can be reached at 831-333-1041. 

1  Tax Return Russian Roulette - noun - a form of legalized gambling with generally poor odds whereby untrained participants willingly subject themselves to cruel and unusual punishment in the form of self-tax preparation, risking thousands of dollars in order to save hundreds. 

Last Updated by Admin on 2011-05-06 16:27:52

Posted in General on May 05, 2011

March 2, 2010

Originally published in the Pacific Grove Hometown Bulletin.

If you are still waiting for your tax forms to arrive in the mail and you refuse to file without them, you might find yourself on a blind date with an IRS agent next year.  No doubt, the agent will be very interested in you, however, the personal finance questions may be a rude topic on a first date.  In case you missed the IRS postcard last October, the decision was made not to mail forms for the 2010 tax year - primarily for economic and technological reasons.  (It is not because the new Congress repealed the income tax system as I saw rumored on one online blog!) 

The decision is only estimated to save taxpayers about $10 million - a seemingly trivial amount by today's standards.  Computerized e-filing continues to devour the tax filing landscape and only 8 percent of Americans received paper packages in the mail in 2009.  In the near future, it is conceivable that virtually all filing with the IRS will be electronic.

So what do you do this year if you still want paper forms?  April 15 is fast approaching. Well, you could go to www.irs.gov and try to navigate and download the forms and publications (I also have links on my website www.tlongcpa.com/forms) - but then again, if you have a paper persuasion, that may not be the answer for you.  You can still get paper forms at the local post office or IRS office and some local libraries.  If you experience a hardship getting the forms or publications, you can call the IRS at 1-800-829-3676 to request them through the mail (it takes about ten days).

If you decide you would like help filing your return there are a number of free options sponsored by the IRS and available for taxpayers meeting certain criteria.  People 60 and older may contact Tax Counseling for the Elderly (TCE) - 1-888-227-7669.  People making $49,000 or less may be able to get assistance via the Volunteer Income Tax Assistance (VITA) program - 1-800-906-9887.  There are other programs as well and full details are available from the IRS.  These programs do not meet the needs of everyone, and your best option may be to call a local tax professional.

No matter what you choose, make sure you file a return if required - I assure you the new Congress did not repeal the income tax system! 

Travis H. Long, CPA is located at 706-B Forest Avenue, Pacific Grove, CA.  Travis can be reached at 333-1041.

Last Updated by Admin on 2011-05-06 16:28:43

Posted in General on May 04, 2011

Originally Published in the Pacific Grove Hometown Bulletin

May 4, 2011

Do I have to withhold taxes for my babysitter, maid, or gardener?

Well? it depends. If you ever plan on running for office you should really consider it, as the seeds for many embarrassing political moments found root in avoiding the so-called? Nanny Tax!? Even if you do not have your heart set on politics there are good reasons you should take the time to consider if you are complying with the law.

General rules: If you pay household employees (defined later) a total between $750 and $999 during a quarter, you are required to withhold California State Disability Insurance (SDI).  If the amount is $1,000 or more you also must pay California Unemployment Insurance (UI), California Employment Training Tax (ETT), and Federal Unemployment Tax (FUTA).   If you pay over $1,700 during the year to a single employee, you are also required to withhold Social Security and Medicare taxes including your share as the employer. You would have to file payroll tax returns and possibly Schedule H with your personal tax returns, and have the employee fill out a Form I-9 Employment Eligibility Verification. These are all manageable tasks you can perform, but most people would rather spend their free time doing something else, and hiring a payroll service instead.

So what is a household employee? This means you have a high degree of control over what, when, and how they do their job. Examples: If your gardeners provide their own supplies, tools, set their own schedules and hold themselves out to the public as providing gardening services, they are not likely to be considered your employees. If you hire a gardener from 8-10 on Tuesdays and Thursdays, tell him what you want him to focus on and he uses your tools, you likely have an employee. A babysitter in your home is likely your employee, but if at their home maybe not. The cleaning person using your supplies and equipment at a time you control is likely your employee whereas the person that shows with window cleaner in-hand, a vacuum, and a business card ?sometime on Wednesday? ? probably not. If your household employee is under 18 and a student you are generally exempt. If you call a company and they send their employee to babysit, clean, garden, etc. then the service provider is the employer and not you. It is a gray area, and you may want to contact a tax professional to discuss.

So I have an employee, but who reports this anyway? It may be true that many people do not report this correctly and not a lot of resources are devoted to enforcement, but that does not help you if you become that example of enforcement. You have to ask yourself is it worth the potential trouble? You would likely be held liable for all taxes including the employee?s share with interest and penalties. If the individual files an unemployment claim or gets hurt at your home, you could be held liable for unemployment or disability payments. And what if the worker is illegal ? that has its own potential civil and criminal penalties. Following the law does serve as a protection to you.

For more information, you can reference the guidance in IRS Publication 926-Household Employer?s Tax Guide and CA EDD-Household Employer?s Guide? both available online.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG. Travis can be reached at 831-333-1041.

Last Updated by Travis H. Long, CPA on 2011-05-04 09:36:49

Posted in Foreclosures and Short-Sales on Apr 20, 2011

Originally Published in the Pacific Grove Hometown Bulletin
April 20, 2011

Where is My Refund?

So you filed your returns on time and you are now waiting for your refund to arrive ? but when? Hopefully you have taken advantage of modern technology by e-filing your tax returns and requesting direct deposit ? not only does this ensure your information is communicated faster and more accurately to the taxing authorities, but it also puts money in your pocket in less time.

Federal

The IRS has an e-file refund cycle chart available online that will tell you the day your check will be deposited or mailed depending on when the return is electronically transmitted and accepted. Generally, it will take one to two weeks for direct deposit or two to three weeks for a paper check. If you mailed your returns, it could take up to six weeks before you hear the jingle in your pocket. If you go to www.irs.gov and click on? Where?s My Refund,? (on the right-hand side of the page) you can enter in your social security number, filing status, and refund amount to determine the exact status of your refund.

California

California refunds are typically paid out within seven to 10 days if you e-filed, or eight weeks if filed by paper! Like the IRS, the FTB has a similar online tool to check the status of your refund. This tool is available at www.ftb.ca.gov/online/refund/index.asp.

What about same-day or next-day refunds?

You have probably heard radio or television ads advertising tax preparation services that can get you a refund almost immediately. This is not what is really happening. No tax preparer or discount chain has a special connection with the IRS or the FTB. The preparer typically teams up with a bank to loan you the money in anticipation of your refund. These are almost always high-interest and high-fee short-term loans and are rarely in your best interest. The tax preparers and the banks funding your? refund? are the ones who usually benefit.

There has been a lot of scrutiny and lawsuits regarding these loans over the past several years. One major chain in California settled a lawsuit in 2009 for nearly $5 million due to the deceptive and pricey structure of these products it was offering to taxpayers. These refund anticipation loans are often likened to pay-day loans and generally should only be used as a last resort in an emergency.

The best way to avoid the need for one of these loans is to ensure you are e-filing with direct deposit and to do better planning during the year by adjusting your withholdings or estimates if there are changes to your tax situation. If you are unsure how to handle this on your own, you may wish to consult with a tax professional. The other option is to just be patient and wait for the refund to come for free!

Travis H. Long, CPA is located at 706-B Forest Avenue, PG. Travis can be reached at 643-1040 x112.

Last Updated by Travis H. Long, CPA on 2011-04-20 09:45:20