Taxes Archives - Page 8 of 9

You May Need To Pay Estimated Taxes If You Make Side Income Blogging Or Via Other Avenues.

I started blogging here on this site only a few months ago, but the site is already starting to generate some income. While that's a wonderful thing, it also means that I need to start thinking about keeping track of my blog income and expenses for this site, in order to start paying taxes on the money I'm making.

If you're making enough income beyond your regular day job, you may need to start thinking about paying estimated taxes 4 times a year as well!

Today I want to look at who needs to pay estimated taxes, and how exactly it works.

Who Should Make Estimated Tax Payments?

In the U.S we have what you call a “pay as you go” type tax system – in other words you need to pay your taxes throughout the year, instead of paying one lump sum at the end of the year.

If you have a day job your taxes are already being withheld for you in the form of payroll tax withholding. If you have it setup just right, your tax liability should be covered for the year through withholdings. If you're off you could end up paying more than you owe (which is why so many people get refunds every year), or you could end up owing more at the end of the year. I usually end up at this end of the spectrum, although I'm usually pretty close to not owing or being due a refund.

When you add in side jobs (or investment income) to the equation – or if you are otherwise self employed, you're probably going to need to think about making estimated tax payments throughout the year in order to cover your tax liabilities, and avoid penalties come tax time.

So how do you make sure that you don't have to pay penalties when the year comes to an end? If you're only making a small amount of income you can meet tax requirements through increased tax withholding at your job. Otherwise, you'll probably need to make estimated tax payments – or do a combination of increased withholding and estimated tax payments. You'll want to research your own situation and figure out what's best for you.

Safe Harbor Requirements To Avoid Tax Penalties

In order to make sure you don't have to pay penalties at the end of the year, you must meet one of the safe harbor requirements at the end of the year.

Owe less than $1,000 for this year’s taxes.
Withhold 100% of last year’s tax liability.
Withhold 90% of this year’s tax liability.

To get started on the estimated tax process, just download tax form 1040-ES, and fill in the blanks to figure out approximately what your estimated tax payments should be for the coming year. If your income isn't stable (as it isn't for most bloggers), you may have to make a bit of an educated guess. But don't worry – that's why they have the safe harbor requirements, so you can avoid penalties if you’re off.

At our house we're going to withhold 100% of our last year’s tax liability to avoid any penalties. We’re also saving up a bit of extra money for any extra tax we may owe at tax time. We'll be saving it in a high yield savings account until tax time comes around.

When Are Estimated Tax Payments Due?

Estimated tax payments are due 4 times throughout the year. They are due on:

April 15
June 15
September 15 (coming soon!)
January 15

Please remember that estimated tax payments are NOT due every 3 months, but are spaced unevenly throughout the year. Because of that it can be easy to forget when they're due, and miss a payment. Set up a reminder for yourself in google calendar or other software, so that you don't forget.

Where Do I Send My Estimated Tax Payment?

You hav a couple of different options to send in and pay your estimated taxes.

Mail your payment in: You can mail your payment in. Figure out where to send your payment here.
Send your payment online: The Electronic Federal Tax Payment System allows you to send your payment in online. Keep in mind that you'll need to register in advance, and it WILL take you a while to receive your required PIN number via snail mail.

State Estimated Tax Payments Are Due As Well!

When paying estimated tax payments it can be easy to forget that they're due for both state and federal taxes – so don't forget to pay both!

Some of the things you'll be paying in estimated tax payments:

Federal estimated taxes
State estimated taxes (if your state has income tax)
Self-employment tax of 15.3% (the social security and medicare portion of your tax).

So remember, you're going to owe taxes on all that income you're earning online, and taxes take a nice big cut out of that money. Even if you meet your safe harbor requirement, it can be easy to far underestimate how much you’ll need to pay your tax bill at the end of the year.

Don't get caught flat-footed. Plan ahead and set your money aside in a high yield savings account, and have that money ready to go at the end of the year!

Do you pay estimated taxes on side income that you earn? Are you just starting to do it this year? Tell us your thoughts on making estimated tax payments, or give us your tips for remembering how to pay at the right time!

Tax Implications Of Strategically Defaulting On Your Underwater Mortgage

By Mr. Money Leave a Comment

A while back I wrote about how millions of homeowners are finding themselves underwater in their mortgage. In other words, they are finding that they owe more on their home than it is currently worth. It's frustrating to have to pay more on your home than you could get for it if you sold, and many are deciding that their best option might just be to strategically default on their mortgage. Why keep paying if your home isn't worth what you thought it was? Why throw good money after bad?

There is a heated debate as to whether strategically defaulting is OK to do morally, but plenty of people are accepting it as a viable alternative. For those that decide to go down that road, are they considering all the implications?

Tax Implications Of A Strategic Default

One thing a lot of people don't realize is that if you strategically default on your home mortgage, and the bank forecloses, you may be liable for the taxes on your forgiven debt.

In many states, any part of a mortgage that the bank forgives is reported as taxable income.

In some states, you’re off the tax hook if the bank forecloses on your original mortgage. But you could still be taxed on a home equity loan or a loan you refinanced.You’ve probably heard that the government has temporarily stopped taxing people who lose or give up their homes. That’s the Mortgage Forgiveness Debt Relief Act (otherwise known as “The Don’t Kick ‘Em When They’re Down Act”). But it doesn’t apply to every mortgage. You can be foreclosed and get a tax bill, too.

The majority of people going through foreclosure have no choice. They can’t afford the payments any more. But a growing number of homeowners are choosing “strategic default.” They’re not broke. They owe more than the house is worth and decide to stop throwing good money after bad. Many considerations come into the default decision — moral, reputational, financial, credit-score, and what the kids will think. Taxes matter, too

So if you default on your mortgage loan, even though you're able to pay the bank – and the bank forgives part of your loan, you could be getting a big tax bill.

You’re generally taxed on debt that a lender forgives. For example, say that you default on a $350,000 first-mortgage loan. The bank sells the property for $250,000. If the bank has the right to pursue you for the remaining $100,000 but doesn’t, that “forgiven” amount is taxed to you. States with these rules are called “recourse” states.

The Debt Relief law wipes out the taxes due, but only for certain types of loans.

In some states — called “non-recourse” states — a bank that forecloses generally does not have the right to chase you for additional money. As a result, the unpaid debt ($100,000, in this example) is not taxed as income. You get away scot free.

So which states are non-recourse states where you'll be off the hook for taxes?

Non-Recourse States: Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah, Washington.

In other states you may be liable for taxes due if the bank forgives part of your principle balance after selling your property.

Other situations in which you won't be liable for taxes due include when you are bankrupt or insolvent.

Tax Forgiveness On Forgiven Debt Doesn't Cover All Loans

There is an asterisk on the tax free status for the non-recourse states. The tax free laws only cover three types of loans:

The original mortgage from when you bought or built the home
The balance of the original mortgage at the time you refinanced.
A cash-out refinancing or home equity loan when the proceeds were used to improve the home.

If you borrowed against your home in order to pay off a credit card, or to buy a car for example, you will be liable for taxes on those amounts.

If you do have part of your mortgage balance forgiven, the bank will issue you a 1099 for taxable income, which you can use when filing your taxes.

What do you think about the tax implications of strategically defaulting on your mortgage? Do you think most people consider that they may have to pay taxes on the forgiven amount of debt? Tell us your thoughts in the comments!

Will The Bush Tax Cuts Be Extended? We Should Have An Answer Soon.

By Mr. Money 4 Comments

A few weeks back I wrote about how the 2001 and 2003 Bush tax cuts will be expiring at the end of the year. At the time it really seemed quite possible that the tax cuts would be allowed to expire, and we would ALL be paying higher taxes come January 1st, 2011. Contrary to popular belief the tax cuts weren't just for the most wealthy, but in fact were put in place for everyone who pays taxes.

President Obama has made it known that he would like to renew the tax cuts for everyone, except those who make over $250,000. Personally I'd like to see the tax cuts renewed for everyone, and government spending slashed across the board.

So the question remains, will congress take up the issue of the Bush tax cuts before the November elections? Will they take it up at all, or just let them expire?

Will Congress Renew The Bush Tax Cuts?

This week we finally got some word on whether Congress will debate the tax cuts. It sounds like they'll be looking into it after the August recess.

Senate Democrats will hold a September showdown over trillions of dollars in expiring tax cuts passed under President George W. Bush.

Senior Democrats had expected the controversial issue to be postponed until after the election, but Senate Majority Leader Harry Reid (D-Nev.) plans to bring it up when lawmakers return from a five-week August recess.

That would make tax cuts a front-and-center issue in the days leading up to the midterm election. The debate promises to be contentious, pitting Democrats against Republicans, liberals against centrists and the Senate against the House.

“I expect it to be on the floor in September,” said Reid spokesman Jim Manley.

Senate Finance Committee Chairman Max Baucus (D-Mont.) acknowledged the Senate Democratic Conference remains uncertain how it will proceed, say sources familiar with talks about a package to extend tax cuts.

“Some members only want to extend the tax cuts for the middle class; some members want to extend all the tax cuts,” said a Democratic aide in reference to differences of opinion within the conference.

“We’re surveying members to see what could be in a package that wins 60 votes and protects the middle class,” said the source.
Democratic and Republican staffs on the Finance Committee have begun talks on how to mark up a tax extensions package. But Finance panel staffers have yet to delve into serious discussions over the substance of the bill.

So Harry Reid has said that we can expect to have the tax cuts brought up after the 5 week August recess. There are still a lot of questions about what type of an extension would be approved – whether it is one where all the tax cuts are extended, or one where they are extended for everyone except for the “wealthy”.

Extension Of Tax Cuts For Everyone, Or Just Some?

Republicans are fighting to have all of the tax cuts extended, while Democrats seem split – with some wanting to extend all of them, others wanting to extend only some, with still others wanting to let them expire completely.

Speaker Nancy Pelosi (D-Calif.)said she expects the Senate to take the lead on extending expiring tax-relief provisions.

Midwestern centrists such as Sens. Kent Conrad (D-N.D.) and Evan Bayh (D-Ind.) have called for an extension of all of Bush’s tax cuts, including those benefiting individuals earning more than $200,000 and families earning over $250,000 annually.

Other Democrats say they would consider raising taxes on individuals and families earning below those thresholds, despite President Obama’s promise that middle-class families would not see their taxes increase.

…

Republicans on Wednesday launched a pre-emptive attack against a partial extension of tax relief.

“They proposed to raise taxes on the top two brackets,” Senate Republican Leader Mitch McConnell (Ky.) said of Democrats during an afternoon press conference.

McConnell said increasing the tax burden on those brackets would affect 50 percent of small-business income and employees who make up 25 percent of the workforce.

McConnell said raising taxes in the middle of a recession would have a “devastating impact.”

So at this point, it sounds like Congress is leaning towards an extension of tax cuts, at least to some degree. The only thing that remains to be seen is whether they'll extend them for everyone, or if the top income brackets will see their taxes go up in 2011.

Conclusion

At this point a lot of people are waiting in limbo to see if their taxes will go up in 2011. (see how much they could go up here). For a lot of small business owners and other high income earners the different between having the tax cuts and not having them could mean a substantial amount of money lost or gained, so for them the stakes are especially high.

What effect will extending the tax cuts have? Some have said that raising taxes now in the middle of a downturn could be disastrous, while others claim that without the added tax revenues the economy will be sunk. I tend to lean more towards the side of tax increases right now being a bad idea – after all, the high income earners, small business owners and others are the ones who are creating jobs for others – and taxing them at ever higher rates will backfire at some point.

What do you think about the Bush tax cuts? Should they be extended, and extended for everyone? Do you think Congress will actually take action, or do you think they'll allow them to expire? Tell us your thoughts in the comments.

How Does A Flexible Spending Account (FSA) Work?

By Mr. Money 11 Comments

This year my company informed us that our company's health care costs were starting to get out of control. Premiums for employees and for the company's portion of the bill were rising. With all the uncertainty that has come with Obama's Health Care plan and as to what will be covered in the future, this year the company decided to kick the can down the road on making hard decisions with the company's health care plan and do a few things to help us save money this year. One thing that they implemented for employees this year was a flexible spending account or FSA. By using this FSA our family will save hundreds of dollars this year on our taxes.

While the FSA has worked out great for us because of our high health care spending at our household this year (we had a baby), it may not be the right option for everyone. We'll explain below.

So What Is A Flexible Spending Account (FSA)?

Flexible Spending Accounts aren't something you're going to find at all places of employment because not everyone offers them. In addition if you're self employed, you aren't able to participate in a FSA plan.

Usually how the FSA plan will work is your company will have an open enrollment period where you can sign up for the company's plan. Our company had that enrollment period earlier this year when we jumped on the opportunity because we knew we were going to have a lot of medical expenses this year with a baby on the way.

When you sign up for your company's plan you'll need to elect an amount that you want deducted pre-tax from your paycheck. That amount you elect to have deducted from your pay will then be split up into your pay periods and deducted from each check. By deducting the money pre-tax it means that you're saving a good amount of money on taxes for the year. The more you deduct for your expected medical expenses, the more you'll save.

Normally you can’t change your amount you’ve elected to deduct from your pay during the year unless certain life events have happened and there has been a change in your employment or family status. (you have a baby or get a new job)

FSA Contributions

As mentioned above when signing up for your FSA you'll need to tell your employer how much you want to contribute to your account for that year. To do that you'll want to estimate how much money you think you'll be paying on medical expenses for the year out of pocket for things like doctor's visits, prescriptions, dental care, and so on.

The government doesn't currently have a limit for the amount that you can add to your FSA account, although most employers will cap the FSA account at a certain percentage or around $5000. My company plan has a limit of $5000, although we designated less than that at $3000 for the year. With that amount we were reasonably sure that we would be able to spend all the money as we were having a baby this year. Remember, you need to be careful about how much you designate for your account, because you have to spend the money – or risk losing it! More on that in the next section.

Our plan has a maximum of $5000 that you can contribute, and at this time we’re contributing $3000. We are expecting our first child this year, and we expect to have substantial medical bills because of that, so using a FSA this year is a good choice for us. With the life change event in July when the baby is born we can elect to increase our contributions if needed. If we expect to use all $5000 of the maximum allowed, we can add the extra contributions to our plan at that time.

FSA Contributions – Use It Or Lose It

FSA plans in most cases have a rule that you must spend the funds added to your account during the year, or you'll lose the money to the plan where it will be used to help cover costs of other plan users who have left their job during the year (before they could add all their funds to the account – even though they've used up their total amount already).

Since funds are subject to forefeit you'll want to make extra sure that you are careful about estimating your health care costs and that you come as close as possible to the reality of what your costs are. For us, we knew just about what we would spend this year based on our spending last year, and the estimated costs of having a baby at our local hospital. In the end we'll end up spending a bit more than we have in our account, but I would rather under-estimate than over estimate – and lose the funds.

FSA Funds Can Be Used At Any Time – The FSA Loophole

One thing that is nice about adding money to a FSA is that you can use your elected funds at any time after you sign up. For example, we have only put in about $1000 in our account so far this year, but within the next couple of weeks we'll have submitted for reimbursements from our account for the full $3000 amount. As long as you've signed up for the account, and are in the plan, you can use up to your full plan election amount at any time.

This point of the FSA has been referred to as the FSA loophole because if you end up leaving a job only part of the way into the year, you no longer have to make contributions to your FSA, even though you’ve used all of your money for the year. The negative balance in your account is balanced out by funds not used by other plan members who have forfeited their funds at the end of the year.

You will sometimes see people who are planning on leaving their company sign up for the FSA plan anyway, knowing they can take advantage of the loophole.

Getting Reimbursed For FSA Approved Expenses

For most FSA plans how it works is you'll pay for all of your health care expenses out of your own pocket, and then once you pay you just submit a claim for reimbursement. Usually you'll get reimbursed in one of three ways.

By Check: You submit documentation of your approved expenses, and within a couple of weeks you'll receive a check in the mail. If something isn't approved or you need further documentation, you'll receive notice.
Direct Deposit: Again, submit your documentation proving your expenses, and if they're approved you'll have the money deposited directly into your account. For us, this is the way our plan works – we submit a fax to the Flex Spending plan administrator and they approve our expenses or ask for more documentation.
FSA debit card: Some plans will just give you a debit card for your flex spending account that allows you to use it to buy approved expenses directly using your funds.

Changes To Flex Spending Accounts Due To Obama Care

After the health care law was passed earlier this year there were a couple of pretty big changes made (for the worse in my opinion).

Over the counter medicines: Starting next year in 2011, flexible spending account money cannot be used for over-the-counter meds unless they are specifically prescribed by a doctor. In current law your FSA funds can be used for over the counter drugs and other items such as eyeglasses, contact solution, bandages and non-prescription forms of birth control.
Limits on your contributions: Starting in 2013, your contributions to your FSA will be capped at $2,500 each year with annual inflation increases. Although there are currently no limits, most employers cap the maximum somewhere around $5,000.

Why are these changes being made? Because they want to collect as much tax money as possible in order to help pay for the trillion dollar Health Care plan. Personally I'm not happy about it as it means I'll most likely end up having to pay for more taxes.

Why FSAs Are Great

If you know that your family will be incurring substantial medical costs during the year, using a FSA plan sponsored by your employer is a great idea. If you estimate how much you'll spend, or even if you know that you'll be leaving your job and want to take advantage of the FSA loophole, you can come out substantially ahead. At our house this year we estimated the amount we were going to spend at around $3000, and in the end we'll end up saving almost $1000 in taxes. Want to figure out how much you could save, check out this FSA Savings calculator.

Do you have a flexible spending account? How much were you able to save in taxes due to your FSA? Tell us your FSA experience, or ask us questions in the comments!

Deadline To Close On Your Home And Receive Your Homebuyer Tax Credit Extended To September 30th

By Mr. Money Leave a Comment

Last month I wrote about how congress and the White House were considering extending the $8,000 and $6,500 homebuyer tax credits. At the time it wasn't a done deal that an extension would be granted because the provision was being included as a rider on a controversial jobs bill that wasn't sure to pass both halls of congress. Sure enough, the bill didn't pass, and legislators were sent scrambling trying to find a way to pass an extension for the thousands of people thought to be in limbo with their closings on their new homes. If something wasn't done they would lose out on the tax credit.

H.R.5623 Passes And Extends Closing Deadline

Last week congress got the deal done and passed H.R.5623 – Homebuyer Assistance and Improvement Act of 2010. The bill doesn't allow new homebuyers to get in on the tax credit, but gives people who were under contract by 4/30/2010 a few extra months to get their deals finalized, and still receive the credit.

From BusinessWeek.com

Qualified homebuyers who signed purchase contracts before April 30 will have until Sept. 30 to complete paperwork and settle on the house. The original settlement deadline was June 30.

“They’re cheering out there, they’re really rejoicing,” Lucien Salvant, a spokesman for the National Association of Realtors, said of homebuyers. The group sought the extension.

The House voted 409-5 on June 29 to extend the deadline, and the Senate approved the measure on a voice vote last night. Republicans, including Senator Jim DeMint of South Carolina, had tried to block the extension, calling the tax-credit program flawed.

“We only created a bubble, which will eventually burst,” DeMint said on the Senate floor late yesterday as the deadline was about to expire. “For the people who haven’t closed on their homes by today, it’s not that they won’t get their house, only that they won’t get a taxpayer subsidy for having bought a house now rather than later.”

The bill was signed into law on July 2nd by President Obama.

Extension Of Homebuyer Tax Credit Will Make Some Happy – Others Skeptical

I know the passage of this bill will be a relief to many folks who ended up buying a house this spring simply because of the credit, and were horrified to find out they might not close on their house in time.

Whether or not this is a good idea is another story. Many have said that the tax credit only artificially pumped up the real estate market, and is causing another mini real estate bubble. They say the worst is yet to come. May and June have both shown a significant drop in new contracts on homes, and some experts expect that to continue.

What do you think about the tax credit extension? Is it ok since it isn't extending the credit to new buyers – and only extending the deadline for those under contract by 4/30? Have the tax credits and other stimulus created another mini-bubble only delaying a bottom to the market? Tell us your thoughts in the comments.

Will Congress Extend The June 30th Deadline To Close On Your Home And Receive Your Homebuyer Tax Credit?

By Mr. Money 8 Comments

The tax credit deadline has been extended from June 30th, 2010 to September 30th, 2010. Details here.

Over the first few months of this year a lot of people who might not otherwise have been looking for new homes decided to move their timetable up, and purchase the home of their dreams because of the first time homebuyer tax credit. Why not move things up a bit if you can get $8000 cash? When the credit was extended to current homeowners as well, things really started to heat up.

April 30th was the hard and fast deadline to be able to get a signed contract and still qualify for the tax credit. Most people were able to reach that deadline with no problem, however, some are now thinking that they're going to miss the June 30th deadline to complete the sale. If they do, they'll get no credit.

Tax Credit Closing Deadline Extended?

Now there is an amendment to H.R. 4213, “the American Jobs and Closing Tax Loopholes Act of 2010” bill being offered that would offer extra time for homebuyers to close the sale.

The amendment, which is attached to another bill, is being sponsored by Senate Majority Leader Harry Reid, D-Nev., Sen. Johnny Isakson, R-Ga., and Christopher Dodd, D-Conn. It was passed by the senate this week, and now needs to be passed by the House.

The bill would simply extend the time available to homebuyers to complete the sale on their new homes from June 30th to September 30th. So will it pass?

Many Sales May Not Complete Without Extension

The National Association of Realtors has been pushing hard for this bill, but many are saying that even with the extension, many of the sales – especially short sales – will still not complete.

Up to 180,000 buyers who were hoping to close by June 30 and get the tax credit are likely to miss the deadline, according to the National Association of Realtors (NAR).

“We are hopeful,” says Paul Bishop, vice president of research with NAR. “We've heard a lot of concern from Realtors out there. There seems to be a sense of fairness. The tax credit was essentially promised” to those buyers.

But some Realtors say even if a three-month extension is granted, that still won't be enough time for buyers pursuing houses through short sales, which can take many months to close.

“How are you going to close a short sale in two months?” says Edward Goldfarb, a Realtor with Keller Williams in Fort Lauderdale. “Hundreds of people are not going to close and are going to lose their tax credit. September is not any better. A short sale can take a year and a half.”

So a lot of people out there are in a holding pattern, hoping to get their credit. Some of them may get it because of the extension, but it sounds like a lot of folks who are buying short sales still may end up being left out in the cold.

Another concern is that buyers who face losing the tax credit could pull out of pending deals altogether. Any extension must be passed this week, or buyers will start canceling deals next week, before the deadline hits, says Richard Smith, president and CEO of Realogy, parent company of Century 21, ERA, Coldwell Banker and Sotheby's International Realty.

“We're concerned, as many people are, that this will force people to cancel their contracts,” Smith says.

So now it is up to the House to get this bill passed so that some homebuyers can be helped. The question remains – how many will it help?

What do you think – should the deadline be extended past the June 30th deadline? Will it be enough time for most unclosed sales, or will it be a pointless exercise? Tell me your thoughts in the comments!

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