1/2/11: It's Tax Time: Will You (And The Irs)Be Ready?
By: Benny L. Kass
Did you ever notice that when you put the words "The" and "IRS" together, it spells "THEIRS?"
Ninety three days from now - or a little more than 2232 hours - we have to file our income tax returns. I suspect some mathematically inclined readers will say "hey! That is April 18; I thought we have to file by the 15 th ".
Normally, that is correct, but since April 15th is Emancipation Day, the Internal Revenue Service has given us the weekend to have the pleasure of filling out those 1040 forms.
Of course, for the procrastinator, you have the right to file for an automatic six month extension by sending the IRS Form 4868. You will get the extension but you still have to pay any tax that is due by April 18. And because October 15 th is a Saturday, the final tax returns are due no later than midnight, Monday, October 18, 2011.
But if you itemize your deductions, do not plan to send the IRS your tax returns until the revised forms are available. Because Congress enacted the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which only became law on December 17 th of last year, the IRS has not yet prepared the necessary forms to comply with this new law. According to the IRS, you may have to wait until mid-to-late February to file your tax return, if you fall into one of the following categories: taxpayers claiming such itemized deductions as mortgage interest or state and local taxes; taxpayers claiming the Higher Education Tuition and Fees Deduction, or those claiming the Educator Expense deduction.
But this does not mean that you can go on vacation until the forms are available. Now is the time to start planning, and organizing both your thoughts as well as your paperwork. If you paid more than $600 in mortgage interest last year, you will soon be receiving form 1098 from your lender or lenders. Don't just file the form away; review it carefully. Lenders - and computers - make mistakes. Get an amortization table from the internet based on your specific loan transaction, and add up the interest you paid. (You can find good information, as well as amortization tables, from the Mortgage Professor's website: www.mtgprofessor.com, and type in "Amortization schedule")
If you find an error, immediately advise your lender so that the mistake can be corrected. This is especially true if the form understates the amount of interest you paid, since mortgage interest is one of the few expenses relating to your home that you can deduct on an annual basis.
Typically, form 1098 will also show the amount of real estate taxes the lender has paid on your behalf, assuming that the lender is escrowing for these taxes. If you bought (or refinanced your house in 2010, review the settlement statement (called a HUD-1). Your settlement attorney may have paid some taxes directly from your loan proceeds, and this amount will not be reflected on the form 1098.
If you were involved in a short-sale of your house last year - or if your house was foreclosed upon - you will get a form 1099-C. If $600 or more of your mortgage debt was cancelled, your lender must send this form to you. In many situations, a tax must be paid on the amount of the cancelled debt. However, there are three important exceptions. First, if you filed for bankruptcy relief and the cancellation is authorized by the Judge, the amount cancelled is not considered income and no additional tax is due.
Second, if you were insolvent immediately before the cancellation - i.e. the total of your liabilities exceeded your assets - no tax is due.
Third, if the cancelled debt relates to your principal residence - the home in which you live most of the year, vote and pay taxes on - and if the money you borrowed was used to buy, build or substantially improve that home, you will not have to pay any income tax on the debt that was forgiven by your lender. However, if you refinanced and used that money to pay for your children's education (or any other purpose other than for the house) you will have to pay tax on that cancelled debt.
If you receive form 1099-C, and if you believe you qualify under one of the three exclusions, you must complete and file form 982 with your final income tax return.
For more information, get IRS Publication 4681, entitled "Canceled Debts, Foreclosures and Repossessions, and Abandonments (for individuals).
In fact, there are a number of very helpful publications on the IRS website (www.irs.gov). According to the IRS, "remember this number: 17. Check out IRS Publication 17, Your Federal Income Tax on the IRS website. It's a comprehensive collection of information for taxpayers highlighting everything you'll need to know when filing your return."
The IRS is also strongly encouraging taxpayers to file electronically. Last year, 70 percent of taxpayers - over 99 million people - used IRS e-file. In a recent tax tip issued by the Service, it was suggested that if you combine e-file with direct deposit, you should get your refund in as few as 10 days. (IRS Tax Tip 2011-01).
A recent study commission on tax reform recommended major changes to our tax system, including putting restrictions on the amount of interest and real estate taxes one will be able to deduct. The law may change under the new Republican-controlled House of Representative. So, make sure that you take all of the legal deductions you can for tax year 2010. It may be the last year these deductions will be available.