IRS Disaster Relief - Tropical Storm Fay Victims

Due to severe storms and flooding on Aug. 18, the federal government has declared Brevard, Hendry, Okeechobee, St. Lucie and Volusia counties in Florida as presidential disaster areas that qualify for Individual Assistance.

As a result, the IRS is postponing until Nov. 17 certain deadlines for taxpayers who reside or have a business in the disaster area. The postponement applies to return filing, tax payment and certain other time-sensitive acts otherwise due between Aug. 18, 2008 and Nov. 17, 2008.

In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after Aug. 18 and on or before Sept. 2, as long as the deposits were made by Sept. 2.

Mortgage Interest Credit

The mortgage interest credit is intended to help lower-income individuals afford home ownership. If you qualify, you can claim the credit each year for part of the home mortgage interest you pay.

You may be eligible for the credit if you were issued a mortgage credit certificate (MCC) from your state or local government. Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home.

The MCC will show the certificate credit rate you will use to figure your credit. It also will show the certified indebtedness amount. Only the interest on that amount qualifies for the credit.

How to claim the credit. To claim the credit, complete Form 8396 and attach it to your Form 1040. Include the credit in your total for Form 1040, line 54; be sure to check box a on that line.

Reducing your home mortgage interest deduction. If you itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction by the amount of the mortgage interest credit shown on Form 8396, line 3. You must do this even if part of that amount is to be carried forward to 2008.

Selling your home. If you purchase a home after 1990 using an MCC, and you sell that home within 9 years, you may have to recapture (repay) all or part of the benefit you received from the MCC program.

Limit based on credit rate. If the certificate credit rate is higher than 20%, the credit you are allowed cannot be more than $2,000.

Limit based on tax. Your credit (after applying the limit based on the credit rate) generally cannot be more than your regular tax liability on Form 1040, line 44, plus any alternative minimum tax on Form 1040, line 45, minus certain other credits. Use Form 8396 to figure this limit.

Carryforward. If your allowable credit is reduced because of the limit based on your tax, you can carry forward the unused portion of the credit to the next 3 years or until used, whichever comes first.

Refinancing. If you refinance your original mortgage loan on which you had been given an MCC, you must get a new MCC to be able to claim the credit on the new loan. The amount of credit you can claim on the new loan may change.
An issuer may reissue an MCC after you refinance your mortgage. If you did not get a new MCC, you may want to contact the state or local housing finance agency that issued your original MCC for information about whether you can get a reissued MCC.

Refinancing & Mortgage Interest deduction

With interest rate being low and everyone trying to refinance the mortgage and cash out – you may want to find out if your mortgage interest deduction on your tax return will be affected.
IRC 163 defines qualified mortgage interest (interest you can deduct if you itemize on Schedule A) as interest paid or accrued during the taxable year on

1. Acquisition indebtedness, which is a loan used to acquire, build, or substantially improve a residence. Interest on up to $1,000,000 such acquisition indebtedness is deductible for taxpayers who itemize their deductions.

2. Home equity indebtedness which is any kind of borrowing against your residence that is not used to acquire, build, or substantially improve that particular residence. It includes the typical "home equity line of credit," as well as the cash-out from a refinance that is not used to substantially improve the home(but may be used to pay your credit card debt, car loan and so on). Interest on up to $100,000 of home equity indebtedness is deductible.

Note that a taxpayer who is subject to the AMT is not allowed the deduction of interest on home equity indebtedness that is not used to acquire, build, or substantially improve the residence.

Revenue Ruling 2005-11 provides an interesting analysis on this issue and every person refinancing and subject to AMT must understand this.

Debt Consolidation:

Most of the time people do not budget their expenses and enjoy a lavish life. The result- they are head to toe in debt. Most of their paycheck goes out in making monthly payments towards these debts. So to meet their bare minimum requirements they again look forward to new debt and hence the cycle goes on. They are stuck in debt forever.

In order to get rid of this debt there are a few things which everyone should consider-

1. Budget & Plan your expenses.
2. Consolidate your debt in a in a single low-interest loan which can save on interest payments and speed the process of paying off debts.
3. Save for future needs and emergencies.

Debt Consolidation may sound as a good option but, beware of the consolidators who promise to get you out of the debt trap but infact drag you into another. Many of these debt consolidators build in a fee and collect it as part of the monthly payment you make to them towards the loan. They may promise you lot of things and present a picture that may make you feel that you can sit back and relax. But, all that is not so true.

Balance transfer may also not be a good option to consider as the rates are guaranteed only for a short period of time and if you cannot make the payment in full by then than you will be subject to their exorbitant interest rate.

In order to get out of the debt,
Some of the options you may want to consider are –

1. Refinance your home mortgage if you have equity in the house and cash out to pay off the high interest loans. Interest rates are low and this may be a good option to consider.
2. Get a home equity loan.
3. Negotiate better terms with the current creditors.
4. Sell off any asset/investment that you may own which is not earning you good returns.
5. Take a loan from family members or relatives.

Do your own homework. Everyone has a right to a debt free life and you can achieve it too if you plan ahead and stay firm on your decision…

India's Independence Day

India celebrates it's 61st independence day!

After more than 200 years of British rule, India became a free nation on 15th August, 1947. We all should be thankful to the hundreds and thousand of martyred souls who laid down their lives to give us the freedom that we are enjoying today. It is because of these freedom fighters that we have come so far and have been recognized in the world for our intelligence, knowledge, hard work & dedication. We have our presence in every country and every field you can name.

Happy Independence Day to You All !!

Globalization - Often asked TAX Question !!

With growing globalization, US Citizens and Permanent resident aliens have been working outside the country more than ever. They often have a misconception that since they are working outside the country, they do not have US Source income so they do not need to file and pay taxes. However, this is not true. I have addressed this issue several times. Here it goes again....

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are subject to tax on your worldwide income. However, you may qualify to exclude from income up to $87.600 for 2008 ($85,700 for 2007) of your foreign earnings. In addition, you can exclude or deduct certain foreign housing amounts.


You may also be entitled to exclude from income the value of meals and lodging provided to you by your employer.

To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following:

1. A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year

2. A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or

3. A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months

The foreign earned income exclusion and the foreign housing cost amount exclusion are figured on Form 2555 (PDF), which must be attached to Form 1040 (PDF). However, if you claim only the foreign earned income exclusion, you may be able to use Form 2555-EZ (PDF) instead.

For detailed information

In case where you do not qualify for the exclusion discussed above, you will be able to claim foreign tax credit. Which means that, to some extent, you will be able to offset your tax liability in US with the foreign taxes you paid on that income to a foreign country. You will have to fill Form 1116 for this purpose and attach to Form 1040.

Beijing host to the 2008 Olympic Games

Wow ….awesome…stunning!
Opening ceremony was– very artistic and well planned.

I have browsed through their website too. It is very informative and has all the possible details that you can think of.


All the best to all the contestants!

Loan Consolidation

With rates being at the all time lows, now may be a good time to consolidate your school or college loans, car loans, credit card loans, variable rate mortgage loans or the adjustable rate mortgage loans.

Refinancing your high interest current mortgages could bring in lot of savings but BEWARE!
Do your homework and get quotes from various lenders, do not let them run your credit unless you are certain that you agree to their terms, make sure that there aren't any hidden fees or costs attached to the loans and of course - NO prepayment penalty!

One of the websites that I often recommend for getting detailed information on consolidating your loans, refinancing or getting mortgage on your primary home is
http://www.bankrate.com/
This website also provides you a comparative list of the lenders in your area with the current offered interest rate.

Good Luck!

Accounting Software

Accounting is a vital element of business. It has been in place since ages. It has evolved from the hand written notes, ledgers, journals to computerized data entry and report generation.

I still remember the time when we used to hand write the vouchers, journals, ledgers and financial statements and than one change in one of the entries would cause us to change all the other books and statements.....Wow that was laborious and time consuming!

Now, computers have made it easy. Everything is instantaneous. Infact, a variety of reports can be generated with a click of mouse.

Markets are filled with various accounting software and finding one which will meet all your needs is challenging. Each software has its advantages and disadvantages and ofcourse you do have options to customize accounting software to meet your needs if you are willing to pay the cost.

Quickbooks, Peachtree, Microsoft Money, Quicken are some of the ones that are most commonly used by small business.

I would suggest you review the needs of your business, consult with the CPA or the tax professional and compare the compatibility of the POS system (if you plan to have one) with your accounting software before you make this decision.

Stock Markets Rally....

Dow, Nasdaq & S&P were up considerably as the Federal Reserve held U.S. interest rates steady and gave no hint to push borrowing costs higher anytime soon. Crude Oil prices were on a slide too.
Considering the volatility in the market....it is difficult to predict where it would be heading next!

American Housing Rescue and Foreclosure Prevention Act of 2008

H.R. 3221, the “American Housing Rescue and Foreclosure Prevention Act of 2008,” was signed into law by the President on July 30, 2008 to support the failing housing market ad help the troubled homeowners. It also aims at tightening lending practices and reform financial institutions associated with that market.
It includes the “Housing Assistance Tax Act of 2008 which provides for important tax law changes that will impact individuals and small businesses.

Some of the highlights are-

Tax credit for First-Time Homebuyers

First time homebuyers purchasing a qualified home after Apr. 8, 2008 and before July 1, 2009, are eligible for a refundable tax credit equal to the lesser of 10% of the purchase price of a principal residence or $7,500 ($3,750 for married individuals filing separately). Though it is a tax credit, it is more like an interest free loan. The credit that is availed by the taxpayers will need to be repaid in equal annual installments over 15 years.

Additional standard deduction available for property taxes

Taxpayers who claim the standard deduction instead of itemizing deductions are allowed to claim an additional standard deduction for state and local property taxes paid in 2008. Note that this deduction is available for 2008 only. As with all the deductions/credits, the deduction cannot exceed the lesser of state and local property taxes actually paid or $500 ($1,000 for joint filers). Considering that the property appraisals are at all time high, I wonder if this would do any good…

Information Reporting of Merchants' Credit Card and Third-Party Network Sales starting 2011.

In the year 2011, the gross amount of credit and debit card payments(gross annual revenue) a merchant receives during the year, along with the merchant's name, address, and taxpayer identification number (TIN) will be required to be reported to the IRS. This has been enacted to nail down the merchants who fail to correctly report income. It, of course, has exceptions for some small businesses with receipts under $20,000 a year. It is believed this will raise over $9.8 billion over ten-years.

Primary residence capital gains exclusion prorated

Capital gain exclusion of $250,000 ($500,000 for married filing joint) that was available on gain from sale of home will now be pro-rated based on the percentage of time the house was used as primary residence in the 5 year period. So if you used the property as rental for 2 years and as your primary residence for 3 years and than you sold the property for a gain of $200,000 than your exclusion under sec 121 will be 60% of $200,000 which is $120,000 since you used your property as primary residence for 60% of the time in the 5 year period. In addition, depreciation recapture rules will apply too. This provision will become effective for sale of residence after December 31, 2008 and will be based only on the non qualified use period that begin on or after January 1, 2009.

Interest Earned on Exempt Facility, Qualified Residential Rental, and Veterans' Mortgage Bonds Isn't an AMT Preference

The Act provides that for bonds issued after July 30, 2008, tax-exempt interest earned on the following instruments is not a preference item for AMT purposes-
(1) exempt facility bonds -95% or more of the net proceeds of which are used to provide qualified residential rental projects (2) qualified mortgage bonds and (3) qualified veterans' mortgage bonds.

Detailed breifing of the Act can be found at
http://tax.cchgroup.com/legislation/2008-Housing-Assistance-Act.pdf

NEW GUIDANCE ON ACCOUNTABLE PLANS

If you are an employer who provides allowances or reimburses employees for travel expenses, you should be aware of new published guidance regarding the requirements of accountable plans.

In Revenue Ruling 2006-56, the IRS analyzed a plan for reimbursing employees for travel and determined that it does not properly track excess payments exhibits a pattern of abuse and therefore fails to qualify as an accountable plan, and is subject to all payments to employees under the plan are subject to employment taxes.

Under IRC sections 62(a)(2) and 62(c), reimbursements for travel (including amounts allowable under established per diem rates) that meet established tests for an accountable plan, are not subject to employment taxes (federal income tax withholding, social security and Medicare).
The following are the three requirements for an accountable plan:

1. There must be a business connection and the expense must be reasonable.
2. There must be reasonable accounting for the expenses.
3. All excess reimbursements must be repaid in a reasonable time.

For Test #2, amounts paid up to the allowable federal per diem rates for meals, expenses for incidental expenses and lodging are deemed substantiated, without the usual requirements for keeping records of the expenses with receipts.

The Regulations provide that, in addition to these three tests, the plan cannot exhibit a “pattern of abuse.” Regulation 1.62-2(k) states that:

If a payer’s reimbursement or other expense allowance arrangement evidences a pattern of abuse of the rules of section 62(c) and this section, all payments made under the arrangement will be treated as made under a nonaccountable plan.

In the case addressed in the revenue ruling, the employer reimbursed truck drivers for meals and incidental expenses incurred on days when they were traveling away from home. The number of travel days was estimated, and paid at a special annually-published daily rate allowable for the transportation industry. Advances were paid based on the expected number of days in out-of-town travel each month. However, it was determined that the system provided no way to track whether the drivers were actually out-of-town on all the days indicated. It was determined that the employer routinely failed to track the excess allowances and to treat them as wages. Therefore, even though the tests for business connection, substantiation, and repayment were met, the plan fails to meet the requirements of an accountable plan.

As a result of the determination that this was not an accountable plan, all reimbursements (not just the amounts in excess of the allowable per diem) were determined to be wages subject to employment tax withholding. The failure to implement and use a mechanism or process to track the excess allowances and to treat any excess allowances as wages subject to employment tax evidences a pattern of abuse under the regulations.

An employer who reimburses employees for travel expenses should be aware of the accountable plan rules and tracking requirements, and understand that amounts paid under nonaccountable plans will be deemed to be wages, includible on Form W-2 and subject to income tax withholding, social security and Medicare taxes. In this case the employer would be liable for penalties and interest on taxes assessed for prior periods. If the anti-abuse requirements are not met, an otherwise accountable plan may be deemed nonaccountable and all reimbursements could be deemed wages subject to tax.

source- http://www.irs.gov/