Mortgage Debt Forgiveness: 10 Key Points

Canceled debt is normally taxable to you, but there are exceptions. One of those exceptions is available to homeowners whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012.
The IRS would like you to know these 10 facts about Mortgage Debt Forgiveness:
1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
2. The limit is $1 million for a married person filing a separate return.
3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.
9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.
For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit www.irs.gov. IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments, is also an excellent resource.

Couples who filed joint returns must now file separate powers of attorney

Couples who filed joint returns must now file separate powers of attorney

NC Budget Enacted Despite Gov. Perdue Veto

The NC House and Senate enacted the 2011-2012 budget on Wednesday, June 15, 2011 despite the veto from Gov. Beverly Perdue. The $19.7 billion budget contains several changes affecting NC tax law. The NC state sales tax will be cut by 1% on July 1, 2011. In addition, the temporary surtax on corporate and individual income taxes will expire. The full text of the House Bill 200 (now Session Law 2011-145) can be downloaded at the NC General Assembly website. (http://www.ncga.state.nc.us/)

--- Donna Boyette, CPA, Senior Staff Accountant
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The North Carolina General Assembly overrode Gov. Bev Perdue’s veto and enacted a budget bill that adopts federal adjusted gross income rather than federal taxable income as the starting point for computing North Carolina personal income tax, enacts a new net business income tax deduction, and retroactively modifies the capital stock base for purposes of determining a taxpayer’s corporate franchise tax liability. The new starting point and deduction are effective beginning with the 2012 tax year. Notably absent from the bill is the extension of the temporary income tax surcharge and the temporary increase in the sales and use tax rates that were enacted in 2009.

The new personal income tax net business income tax deduction is equal to the first $50,000 of net business income minus any passive income the taxpayer receives during the taxable year. By adopting federal adjusted gross income as the starting point, North Carolina no longer incorporates the federal standard deduction or personal exemption amounts and, therefore, no longer requires the corresponding North Carolina adjustments beginning with the 2010 tax year. The standard deduction amount will be set as follows depending on the taxpayer’s filing status:

• Married, filing jointly—$6,000
• Head of Household—$4,400
• Single—$3,000
• Married, filing separately—$3,000

The personal exemption amount will be $2,500 for taxpayers with incomes up to the following limits:

• $100,000 for taxpayers filing married, filing jointly
• $80,000 for taxpayers filing as heads of household
• $60,000 for single taxpayers
• $50,000 for taxpayers filing married, filing separately

The personal exemption for taxpayers with incomes above these thresholds will equal $2,000. Reserves for amortization of intangible assets as permitted for income tax purposes are deducted from the capital stock base for purposes of determining a taxpayer’s corporate franchise tax liability, effective retroactively to post-2006 tax years. Previously, the statute only authorized the deduction of reserves for depreciation of tangible assets in the capital stock base.

--- Written by CCH Incorporated

Tax Tip: Organizing Your Tax Information Throughout the Year

Now that tax season is over, you might think, “what can I do to make this process easier?”. There are many approaches to handling the myriad of paperwork we face every day, but you have to find the one that works for you. Some people like to keep everything related to their monthly bills, while others throw out all but the most important items. I believe there needs to be a happy medium.

No matter how you track your payments, whether it is through a special software program, such as Quicken, Quickbooks, Excel spreadsheets or just keeping up with your checkbook, you will need to retain your receipts for a certain period of time. Refer to our Record Retention Guidelines found at the bottom of the “What’s New” page on our website, then start the process of preparing for next year right now!

I like to put my bills in monthly files, then at the end of the year, throw out all insignificant non-tax related items. I keep such receipts as those related to car maintenance & repairs, large items purchased that might have a warranty or that I expect to last more than a year, improvements to my home, and other important documents. I have what would be considered permanent files where these items go. As year-end information comes in, I put them all in one special file.

Some people prefer to toss the unnecessary monthly bills each month. These bills might include supplies purchased for personal use, cable TV bills, etc. If you work at home, be careful when it comes to utility, telephone and other bills which might be used to calculate a home office deduction. For the bills you keep, always make a note as to the date paid, check number and the amount, if different from the bill. This notation will help you track the payment should the need arise.

If you’re in the habit of tossing, rather than keeping, then you will still need a place to corral the important documents. If you’re not a person who will file, then a large manila envelope might just be the ticket. You can have one for each category that is needed to easily find the receipt later, such as, medical expenses, auto expenses, property taxes, insurance, etc. Some people like to have a box or bin of some sort where they can easily accumulate a year’s worth of payments. This necessitates a lot of rummaging if you find that you need to refer to a bill later.

Whatever your style, you want to make sure that come tax time next year, you have the information readily available to complete the organizer. Even if you don’t complete the organizer, you can use it to check off the information you have to reveal what is left to gather. Then before you make your appointment for your tax preparation, you can see whether you have received all your Form 1099s and if you need to obtain more receipts for your expenditures. The more prepared you are for the meeting, your tax advisor is better able to give you the best service possible. That’s where I’m coming from.

--- Rosa Read, CPA – Senior Staff Accountant

North Carolina Scheduled to Reduce Sales and Use Tax Rate on July 1

The NC Department of Revenue reminded taxpayers on Friday May 13 that the State sales and use tax rate is scheduled to decrease on July 1. The announcement is posted on the NC Department of Revenue website. However, July 1 is still several weeks away, so don't reprogram your cash registers yet! The NC General Assembly could still enact legislation to extend the higher tax rate. Legislation has already been introduced to extend the rate through 2013 (House Bill 884, Extend Temporary Sales Tax Rate Increases 2 Years). Check this blog and our Twitter page for the latest developments. Attached is an excerpt of the notice from the NC Department of Revenue.

--- Donna Boyette, CPA, Senior Staff Accountant

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State Sales and Use Tax Rate Scheduled to Decrease July 1, 2011
The general State sales and use tax rate is scheduled to reduce from 5.75% to 4.75% effective July 1, 2011. You are encouraged to check the Department’s website for updates to stay informed of any changes as proposed legislation has been introduced that may affect the State tax rate reduction.

Effective July 1, 2011, the general State tax rate applicable to sales and purchases of tangible personal property, certain digital property, and certain services is 4.75%. As a result, the general State and local tax rate will be 6.75% in eighty-two counties, 7% in Alexander, Catawba, Cumberland, Duplin, Haywood, Hertford, Lee, Martin, New Hanover, Onslow, Pitt, Randolph, Robeson, Rowan, Sampson, Surry and Wilkes Counties, and 7.25% in Mecklenburg County.

Effective July 1, 2011, gross receipts derived from providing telecommunications service, ancillary service, and video programming in this State, and sales of spirituous liquor other than mixed beverages are subject to the “combined general rate” of 7% for every county in the State. The combined general rate is the State’s general rate plus the sum of the rates of local taxes authorized for every county in the State.

Taxpayers that file Form E-500, Sales and Use Tax Return, should report taxable purchases for use and taxable receipts at the 4.75% Gen. State Rate on the existing returns. The Department will not create and provide new returns.

Taxpayers that file Form E-500E, Utility and Liquor Sales and Use Tax Return, should report the tax liability on the existing returns. Prior to August 1, 2011, a worksheet will be created and posted by the Department on its website for use in completing Form E-500E returns.

Additional information regarding the general State sales and use tax rate will be posted by the Department on the website prior to July 1, 2011. Questions about the notice should be directed to the Taxpayer Assistance Call Center at telephone number 1-877-252-3052 (toll-free).

http://www.dor.state.nc.us/taxes/sales/impnotice_2011_05_13.pdf

Roth Part II - To Convert to a Roth or not to Convert – The Answer is Maybe

The Roth IRA has been around for more than a decade, so why have you been hearing so much about it over the last year? Before 2010, taxpayers with AGI, or Adjusted Gross Income, over $100,000 were not allowed to convert or to roll over funds from traditional (deductible or non-deductible) IRA accounts or certain employer-sponsored retirement plans (ex. 401(k) plans) to a Roth account. For 2010 and later, taxpayers of all income levels and filing statuses can convert to a Roth account.

Traditional, deductible IRA accounts and employer-sponsored retirement plans allowed people to exclude their contributions when figuring their taxable income. That is one of the beauties of the traditional IRA and other retirement plans – do not pay tax on the money now, but pay the tax on the withdrawals years later.

So what happens when you convert to a Roth IRA? When the money is converted to a Roth IRA account, income tax is paid on the funds in the year of the conversion. How much tax you pay in the year of conversion is a complex formula based on your tax rate and the value of your IRA accounts at the time of conversion. Only for 2010, the income from the conversion will not be recognized in 2010, but half will be recognized in 2011 and half will be recognized in 2012.

So if you report the converted amount as income and pay income tax, why would you convert? Isn’t better to wait and pay the tax when you withdraw the money from the account? The decision to convert boils down to several questions:
1. do you have the money to pay the tax now from accounts other than the IRA;
2. what do you plan to do with the money in the future;
3. how long do you have until retirement; and
4. what do you think the tax rates will be when you retire.

There is no right answer. In fact, there are several professional software programs designed to help your tax adviser walk through the possibilities to see if a conversion is right for you.

What if you decide you do not want to convert after the paperwork is signed? You can take advantage of the "free look" provisions in the law. These rules allow you to reverse or "recharacterize" your Roth converted amounts back to a traditional IRA. However, the recharacterization must be done by the time you file your tax return, including the extension period.

With concerns about the overall economy, sluggish investment returns, lower retirement account values and potential future increases in tax rates, the time could be right to recognize income today with the thought of finding tax savings in the future.

--- Donna Boyette, CPA, Senior Staff Accountant

UPDATE - NC Governor Signs Conformity Bill

On March 17, 2011, Gov. Beverly Perdue signed legislation that would accept some, but not all, of the changes created in the federal tax law by the 2010 Jobs Act and the 2010 Tax Relief Act, both enacted in late 2010. Below is a summary of the provisions of the new law.

With this new law, the 2010 depreciation rules are different for NC income tax purposes and federal income tax purposes. It is important to make the necessary adjustments on the 2010 NC income tax return, if you take advantage of the expanded federal provisions.

This new development may significantly impact your return for 2010. Give us a call if you have any questions about how this new legislation affects you.

--- Smith Miller & Buff, CPA, PA team
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North Carolina Gov. Beverly Perdue has signed legislation that updates the state's Internal Revenue Code (IRC) conformity date from May 1, 2010, to January 1, 2011, for personal and corporate income tax purposes, thereby incorporating most of the amendments made by the Small Business Jobs Act of 2010 (2010 Jobs Act) and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act), effective March 17, 2011. However, any amendments made to the IRC after May 1, 2010, that increase North Carolina taxable income for the 2010 taxable year become effective beginning with the 2011 tax year. In addition, the legislation partially decouples from federal amendments made by these federal acts that increased and extended the IRC §168 bonus depreciation deduction and the IRC §179 asset expense deduction.

Bonus Depreciation
The 2010 Jobs Act extended the 50% bonus depreciation provision to property placed in service in taxable years 2010 and 2011. The 2010 Tax Relief Act boosted the 50% bonus depreciation to 100% for property acquired and placed in service after September 8, 2010, and before January 1, 2012, and it provided 50% bonus depreciation for property placed in service during the 2012 calendar year. The amendments made by this bill partially decouple from the extension of the IRC §168(k) additional bonus depreciation and the IRC §168(n) additional bonus depreciation deduction for disaster-related property by requiring taxpayers to make an addition adjustment on the North Carolina return equal to 85% of the deduction claimed on the 2010 through 2012 federal returns but allowing taxpayers who make the addition adjustment to subsequently deduct the amount added back ratably over a five-year period.

IRC §179 Asset Expense Deduction
The legislation also partially decouples from the increase and extension of the IRC §179 asset expense deduction for the 2010 and 2011 taxable years. Prior to the enactment of the 2010 Jobs Act the deduction limit was $250,000 and the investment limit was $800,000 for both federal and North Carolina income tax purposes. The expensing limits were scheduled to revert to their prior levels in 2011. Amendments made by the 2010 Jobs Act and the 2010 Tax Relief Act did the following:
• expanded the deduction limits from $250,000 to $500,000 for the 2010 taxable year and from $25,000 to $500,000 for the 2011 taxable year;
• expanded the investment limits from $800,000 to $2 million for the 2010 taxable year and from $200,000 to $2 million for the 2011 taxable year;
• expanded the deduction limit from $25,000 to $125,000 for the 2012 tax year;
• expanded the investment limit from $200,000 to $500,000 for the 2012 tax year; and
• broadened the definition of "qualified property" to include certain real property investments for the 2010 and 2011 taxable years.

Thereafter, the expensing deduction and investment limits are scheduled to revert in 2013 to their prior levels of $25,000 and $200,000, respectively. Amendments made by the bill signed by Gov. Perdue maintain for North Carolina income tax purposes the 2010 deduction and investment limits of $250,000 and $800,000 for taxable years 2010 and 2011. The legislation requires taxpayers to add back on their North Carolina return 85% of the additional expensing taken under federal law in 2010 and 2011, but allows taxpayers to deduct 20% of the add back amount over the succeeding five years. North Carolina will conform to the expensing limits of $125,000/$500,000 for the 2012 taxable year and also conforms to the expansion of the definition of "qualified property" to include certain real property investments for the 2010 and 2011 tax years.

H.B. 124, Laws 2011, effective March 17, 2011, and applicable as noted

--- written by CCH Incorporated