Here are ten facts from the IRS about gains and losses and how they can affect your Federal income tax return.

1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.

2. When you sell a capital asset, the difference between the amount you sell it for and your basis – which is usually what you paid for it – is a capital gain or a capital loss.

3. You must report all capital gains.

4. You may deduct capital losses only on investment property, not on property held for personal use.

5. Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.

6. If you have long-term gains in excess of your long-term losses, you have a net capital gain to the extent your net long-term capital gain is more than your net short-term capital loss, if any.

7. The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2010, the maximum capital gains rate for most people is 15%. For lower-income individuals, the rate may be 0% on some or all of the net capital gain. Special types of net capital gain can be taxed at 25% or 28%.

8. If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.

9. If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.

10. Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040

 

Scams involving the impersonation of the IRS usually take the form of e-mails, tweets, or other online messages to consumers. Scammers may also use phones and faxes to reach intended victims. Some scammers set up phony Web sites.

The IRS and E-mail

Generally, the IRS does not send unsolicited e-mails to taxpayers. Further, the IRS does not discuss tax account information with taxpayers via e-mail or use e-mail to solicit sensitive financial and personal information from taxpayers. The IRS does not request financial account security information, such as PIN numbers, from taxpayers.

Object of Scams

Most scams impersonating the IRS are identity theft schemes. In this type of scam, the scammer poses as a legitimate institution to trick consumers into revealing personal and financial information – such as passwords and Social Security, PIN, bank account and credit card numbers – that can be used to gain access to their bank, credit card, or other financial accounts.

Attempted identity theft scams that take place via e-mail are known as phishing. Other scams may try to persuade a victim to advance sums of money in the hope of realizing a larger gain. These are known as advance fee scams.

How an Identity Theft Scam Works

Most of the scams that impersonate the IRS are identity theft scams. Typically, a consumer will receive an e-mail that claims to come from the IRS or Treasury Department. The message will contain an enticing or intimidating subject line, such as “Tax Refund,” “Inherited Funds,” or “IRS Notice.” Usually, the message will state that the recipient needs to provide the IRS with information to obtain the refund or avoid some penalty. The message will instruct the consumer to open an attachment or click on a link in the e-mail. This may lead to an official-looking IRS Web site. The look-alike site will then contain a phony but genuine-looking online form or interactive application that requires personal and financial information, which the scammer then uses to commit identity theft.

Alternatively, the clicked link may secretly download malware to the consumer’s computer. Malware is malicious code that can take over the computer’s hard drive, giving the scammer remote access to the computer, or it could look for passwords and other information and send them to the scammer.

Phony Web or Commercial Sites

In many IRS-impersonation scams, the scammer sends the consumer to a phony Web site that mimics the appearance of the genuine IRS Web site, IRS.gov. This allows the scammer to steer victims to phony interactive forms or applications that appear genuine but require the targeted victim to enter personal and financial information that will be used to commit identity theft.

The official Web site for the Internal Revenue Service is IRS.gov, and all IRS.gov Web page addresses begin with http://www.irs.gov/.

In addition to Web sites established by scammers, there are commercial Internet sites that often resemble the authentic IRS site or contain some form of the IRS name in the address but end with a .com, .net, .org, or other designation instead of .gov. These sites have no connection to the IRS. Consumers may unknowingly visit these sites when searching the Internet to retrieve tax forms, publications, and other information from the IRS.

Frequent or Recent Scams

There are a number of scams that impersonate the IRS. Some of them appear with great frequency, particularly during and right after filing season, and recur annually. Others are new.

• Refund Scam: This is the most frequent IRS-impersonation scam seen by the IRS. In this phishing scam, a bogus e-mail claiming to come from the IRS tells the consumer that he or she is eligible to receive a tax refund for a specified amount. It may use the phrase “last annual calculations of your fiscal activity.” To claim the tax refund, the consumer must open an attachment or click on a link contained in the e-mail to access and complete a claim form. The form requires the entry of personal and financial information. Several variations on the refund scam have claimed to come from the Exempt Organizations area of the IRS or the name and signature of a genuine or made-up IRS executive. In reality, taxpayers do not need to complete a special form to obtain their federal tax refund. Refunds are triggered by the tax return they submitted to the IRS.
• Lottery winnings or cash consignment: These advance fee scam e-mails claim to come from the Treasury Department to notify recipients that they’ll receive millions of dollars in recovered funds, lottery winnings, or cash consignment if they provide certain personal information, including phone numbers, via return e-mail. The e-mail may be just the first step in a multistep scheme in which the victim is later contacted by telephone or further e-mail and instructed to deposit taxes on the funds or winnings before they can receive any of it. Alternatively, they may be sent a phony check of the funds or winnings and told to deposit it but pay 10 percent in taxes or fees. Thinking that the check must have cleared the bank and is genuine, some people comply. However, the scammers, not the Treasury Department, will get the taxes or fees. In reality, the Treasury Department does not become involved in notification of inheritances or lottery or other winnings.
• Beneficial Owner Form: This fax-based phishing scam, which generally targets foreign nationals, recurs periodically. It’s based on a genuine IRS form, the W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. The scammer, though, invents his or her own number and name for the form. The scammer modifies the form to request passport numbers, information that is often used for account security purposes (such as mother’s maiden name), and similar detailed personal and financial information, and states that the recipient may have to pay additional tax if he or she fails to immediately fax back the completed form. In reality, the real W-8BEN is completed by banks, not individuals.

Other Known Scams

The contents of other IRS-impersonation scams vary but may claim that the recipient will be paid for participating in an online survey or is under investigation or audit. Some scam e-mails have referenced Recovery-related tax provisions, such as Making Work Pay, or solicited for charitable donations to victims of natural disasters. Taxpayers should beware an e-mail scam that references underreported income and the recipient’s “tax statement,” since clicking on a link or opening an attachment is known to download malware onto the recipient’s computer.

How to Spot a Scam

Many e-mail scams are fairly sophisticated and hard to detect. However, there are signs to watch for, such as an e-mail that:

• requests detailed or an unusual amount of personal and/or financial information, such as name, SSN, bank or credit card account numbers, or security-related information, such as mother’s maiden name, either in the e-mail itself or on another site to which a link in the e-mail sends the recipient;
• dangles bait to get the recipient to respond to the e-mail, such as mentioning a tax refund or offering to pay the recipient to participate in an IRS survey;
• threatens a consequence for not responding to the e-mail, such as additional taxes or blocking access to the recipient’s funds;
• gets the Internal Revenue Service or other federal agency names wrong;
• uses incorrect grammar or odd phrasing (many of the e-mail scams originate overseas and are written by non-native English speakers);
• uses a really long address in any link contained in the e-mail message or one that does not start with the actual IRS Web site address (http://www.irs.gov). The actual link’s address, or url, is revealed by moving the mouse over the link included in the text of the e-mail.

What to Do

Taxpayers who receive a suspicious e-mail claiming to come from the IRS should take the following steps:

• Avoid opening any attachments to the e-mail, in case they contain malicious code that will infect your computer.
• Avoid clicking on any links, for the same reason. Alternatively, the links may connect to a phony IRS Web site that appears authentic and then prompts for personal identifiers, bank or credit card account numbers, or PINs.
• Visit the IRS Web site, www.irs.gov, to use the “Where’s My Refund?” interactive tool to determine if you are really getting a refund, rather than responding to the e-mail message.
• Forward the suspicious e-mail or url address to the IRS mailbox phishing@irs.gov, and then delete the e-mail from your inbox.
• Consumers who believe they are or may be victims of identity theft or other scams may visit the U.S. Federal Trade Commission’s Web site for identity theft, www.OnGuardOnline.gov, for guidance on what to do. The IRS is one of the sponsors of this site.

If you’ve received an email claiming to be from the IRS, call us to talk it over before taking any action. We don’t want you to fall victim to a scam.

 

• How much – if any – of your Social Security benefits are taxable depends on your total income and marital status.
• Generally, if Social Security benefits were your only income for 2010, your benefits are not taxable and you probably do not need to file a federal income tax return.
• If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status.
• Your taxable benefits and modified adjusted gross income are figured on a worksheet in the Form 1040A or Form 1040 Instruction booklet.
• You can do the following quick computation to determine whether some of your benefits may be taxable:
  • First, add one-half of the total Social Security benefits you received to all your other income, including any tax exempt interest and other exclusions from income.
  • Then, compare this total to the base amount for your filing status. If the total is more than your base amount, some of your benefits may be taxable.
• The 2010 base amounts are:
  • $32,000 for married couples filing jointly.
  • $25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouses at any time during the year.
  • $0 for married persons filing separately who lived together during the year.

Links:
Publication 915, Social Security and Equivalent Railroad Retirement Benefits

Note:
Social Security Benefits are exempt from North Carolina income even if taxable on the federal return.

 

By contrast, grocery costs are often more controllable. About 30% of an average American household’s monthly budget is spent on food, so careful planning and a little discipline when cruising the supermarket aisles can generate significant savings. Here are four suggestions for taming your grocery bill.

• Avoid prepackaged foods. Bagged salads may save a little time, but they often exceed the cost of individual ingredients. Instead of buying hamburger (or tuna or chicken) helper, purchase the rice separately. Add your own spices and herbs. Make your own “prepackaged” helpers to save time and expense.

• Skip the energy bars. These items are often impulse buys. That’s why marketing departments place them at eye level near the checkout stand. Read the label and you may find that your “energy” bar is simply glorified candy, loaded with fat and sugar, and costing a bundle.

• Stock up on coupons. Your mother and grandmother used them, and for good reason. Clipping coupons can make a huge dent in your grocery bill. And these days you can find coupons online, as well as in your Sunday newspaper supplement. Printable coupon sites include Coupons.com and SmartSource.com.

• Use care at the warehouse store. Bulk-purchase stores offer great deals on everything from toilet paper to hamburger to electronics. But buying in bulk doesn’t always translate to savings. Consider whether a better price is available at your local supermarket, especially when coupons are available. And don’t fall into the trap of buying more than you really need, just because the unit price is cheap. Six months later, when you’re throwing away that unused package of freezer-burned chicken, you may wonder whether the “bargain purchase” was really a bargain.

 

Roth IRA 5 year rule. Withdrawals from your Roth IRA will only be classified as qualified distributions if it has been at least 5 years since you first opened and contributed to your Roth IRA, regardless of your age when you opened it. As an example, you can normally make penalty free withdrawals at age 59½, but if you made your first contribution at age 58, you would need to wait until age 63 to withdraw any earnings made on that portion of your contributions.

There are exceptions to these rules. Read on to learn more about qualified and non-qualified distributions, and as always, consult with a financial professional if you have any questions before you make any withdrawals or distributions.

Roth IRA Qualified and Non-qualified Distributions

It is important to understand the difference between qualified and non-qualified distributions before making any withdrawals or taking distributions from your Roth IRA. Provided your it meets the 5 year rule, a qualified distribution from your Roth IRA will be both tax and penalty free, which is important because either of these can seriously erode any gains your investments may have earned. A non-qualified distribution may trigger both taxes and early withdrawal penalties, decimating the value of the investments in your Roth IRA.

Qualified distributions. Qualified distributions are withdrawals that are both tax and penalty free. In most cases, withdrawals made after age 59½ will be qualified distributions, provided they meet the 5 year rule for investment gains. According to IRS Publication 590:

A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and
2. The payment or distribution is:

• Made on or after the date you reach age 59½,
• Made because you are disabled,
• Made to a beneficiary or to your estate after your death, or
• One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

Non-qualified distributions. Non-qualified distributions are withdrawals which do not meet the requirements of a qualified distribution, and may be subjected to taxes or early withdrawal penalties. In many cases, non-qualified distributions will be taxed as ordinary income and be subjected to the 10% early withdrawal penalty.

Exceptions to early withdrawal penalty (aka 10% penalty)

There are some exceptions that allow you to make withdrawals from your Roth IRA that are subjected to ordinary income taxes, but are not subjected to the 10% early withdrawal penalty. Some of these include:

• The distributions are part of a series of substantially equal payments (minimum five years or until the Roth IRA owner reaches age 59½, whichever is longer).
• You have unreimbursed medical expenses exceeding 7.5% of your Adjusted Gross Income (AGI).
• You are paying medical insurance premiums after losing your job.
• The distributions are not more than your qualified higher education expenses (for yourself or eligible family members).
• The distribution is due to an IRS levy of the qualified plan.
• The distribution is a qualified reservist distribution.
• The distribution is a qualified disaster recovery assistance distribution.
• The distribution is a qualified recovery assistance distribution.

Order of Roth IRA Distributions

The IRS makes it easier for taxpayers to make penalty free withdrawals from their accounts by the way they assign the order of IRA withdrawals. Again, referring to IRS Publication 590, Roth IRA distributions occur in the following order:

1. Regular contributions.
2. Conversion and rollover contributions, on a first-in first-out basis.
3. Earnings on contributions.

As you can see, regular contributions are the first to be withdrawn, and they can be withdrawn at any time without taxes or penalties. The taxable portion of your withdrawals is held until the end, making it easier for you to make a penalty free withdrawal.

Roth IRA Withdrawals for first home purchase or college expenses

Roth IRAs have a feature that allows account holders to make qualified distributions for a first home purchase or for qualified college expenses.

First home purchase withdrawal from Roth IRA. Early Roth IRA withdrawals for the purchase of a first home are allowed up to a $10,000 life time maximum per account. Withdrawals can be made for the purchase of your first home, or the benefit can be used for your children or grandchildren. However, the $10,000 limit is always in effect, regardless of who the money is used for.

Using a Roth IRA for college expenses. You can avoid early withdrawal penalties associated with early Roth IRA distributions if you use the funds for qualified higher education expenses for yourself, your spouse, your children, or their descendants.

Pros and Cons of early Roth IRA withdrawals

The ability to make tax and penalty free withdrawals from Roth IRAs is a level of flexibility not found in most other retirement accounts. But just because you can do it doesn’t mean you should. Even though you may not pay any taxes or penalties to withdraw some of your funds, doing so may hurt your long term retirement planning.

Roth IRAs offer a great tax diversification strategy and making early withdrawals, qualified or not, hampers your retirement planning and limits the amount of money you will have in retirement. Compound interest is one of the most powerful forces in the universe, but making withdrawals limits the amount of money you have working for you and reduces the amount of time your money has to compound, effectively reducing your potential retirement nest egg. I recommend looking at all options before making early withdrawals from your Roth IRA.

Source: Cashmoneylife

 

Credits are the “building blocks” we use to find out whether you have the minimum amount of covered work to qualify for each type of Social Security benefits. If you stop working before you have enough credits to qualify for benefits, your credits will stay on your record. If you return to work later on, you can add more credits so that you can qualify. No benefits can be paid if you do not have enough credits.

Previously called “Quarters of Coverage.” As you work and pay taxes, you earn credits that count toward your eligibility for future Social Security benefits. You can earn a maximum of four credits each year. Most people need 40 credits to qualify for benefits. Younger people need fewer credits to qualify for disability or survivors benefits.

The credits are based on the amount of your earnings. We use your work history to determine your eligibility for retirement or disability benefits or your family’s eligibility for survivors benefits when you die.

Each year the amount of earnings needed for credits goes up slightly as average earnings levels increase. The credits you earn remain on your Social Security record even if you change jobs or have no earnings for a while

In 2011, you receive one credit for each $1,120 of earnings, up to the maximum of four credits per year.

How long must you work to qualify for Social Security?

The number of credits you need to be eligible for benefits depends on your age and the type of benefit.

Retirement benefits

Anyone born in 1929 or later needs 10 years of work (40 credits) to be eligible for retirement benefits. People born before 1929 need fewer years of work.

Disability benefits

How many credits you need for ­disability benefits depends on how old you are when you become disabled.

• If you become disabled before age 24, you generally need 1½ years of work (six credits) in the three years before you became disabled.
• If you are 24 through 30, you generally need credits for half of the time between age 21 and the time you became disabled.
• If you are disabled at age 31 or older, you generally need at least 20 credits in the 10 years immediately before you became disabled. The following table shows examples of how many credits you would need if you became disabled at various selected ages. This table does not cover all situations

Survivors benefits

When a person who has worked and paid Social Security taxes dies, certain members of the family may be eligible for survivors benefits. Up to 10 years of work is needed to be eligible for benefits, depending on the person’s age at the time of death. Survivors of very young workers may be eligible if the deceased worker was employed for 1½ years during the three years before his or her death.

Social Security survivors benefits can be paid to:

• A widow or widower—full benefits at full retirement age, or reduced benefits as early as age 60.
• A disabled widow or widower—as early as age 50.
• A widow or widower of any age who takes care of the deceased’s child who is younger than age 16 or disabled, and receiving Social Security benefits.
• Divorced spouses under certain conditions.
• Unmarried children younger than age 18, or up to age 19 if they attend elementary or secondary school full time. Under certain circumstances, benefits can be paid to stepchildren, grandchildren or adopted children.
• Children who were disabled before age 22 and remain disabled.
• Dependent parents age 62 or older.
• Contact us if you need more information about your family’s situation.

Medicare

The Social Security credits you earn also count toward eligibility for Medicare when you reach age 65. You may be eligible for Medicare at an earlier age if you get disability benefits for 24 months or more. Those who have permanent kidney failure or get disability benefits because of amyotrophic lateral sclerosis (Lou Gehrig’s disease) do not have to wait 24 months to receive Medicare coverage. Your dependents or survivors also may be eligible for Medicare at age 65 or earlier if they are disabled. People who have permanent kidney failure and need kidney dialysis or a kidney transplant may be eligible for Medicare at any age based on a spouse’s or parent’s earnings as well as their own

Make sure your records are accurate

Each year your employer sends a copy of your W-2 (Wage and Tax Statement) to Social Security. Social Security compares your name and Social Security number on the W-2 with our records. When we find your name and number, your earnings shown on the W-2 are recorded on your lifelong earnings record. Your lifelong earnings record is what we use to figure whether you can get future benefits and the benefit amount.

It is critical that your name and Social Security number on your Social Security card agree with your employer’s payroll records and W-2. If they do not agree, your employer may get a letter from Social Security. This letter does not mean that your employer should change your job, lay you off, fire you or take other action against you. You need to correct the error. It is up to you to make sure both records are correct. If your Social Security card is not correct, contact any Social Security office. Tell your employer if your name and Social Security number are incorrect on the employer’s record.

Special Rules for the Self-Employed

Special rules for earning Social Security coverage apply to certain types of work.

If you are self-employed, you earn Social Security credits the same way employees do (one credit for each $1,120 in net earnings, but no more than four credits per year). Special rules apply if you have net annual earnings of less than $400

Most people who pay into Social Security work for an employer. Their employer deducts Social Security taxes from their paycheck, matches that contribution and sends taxes to the Internal Revenue Service (IRS) and reports wages to Social Security. But self-employed people must report their earnings and pay their taxes directly to IRS.

You are self-employed if you operate a trade, business or profession, either by ­yourself or as a partner. You report your earnings for Social Security when you file your federal income tax return. If your net earnings are $400 or more in a year, you must report your earnings on Schedule SE in addition to the other tax forms you must file.

Figuring your net earnings

Net earnings for Social Security are your gross earnings from your trade or business, minus your allowable business deductions and depreciation.

Some income does not count for Social Security and should not be included in ­figuring your net earnings:  

• Dividends from shares of stock and ­interest on bonds, unless you receive them as a dealer in stocks and securities;
• Interest from loans, unless your business is lending money;
• Rentals from real estate, unless you are a real estate dealer or regularly provide services mostly for the convenience of the occupant; or
• Income received from a limited partnership.

Paying Social Security and Medicare taxes

The Social Security tax rate for 2010 is 15.3 percent on self-employment income up to $106,800. If your net earnings exceed $106,800, you continue to pay only the Medicare portion of the Social Security tax, which is 2.9 percent, on the rest of your earnings.

There are two income tax deductions that reduce your taxes.

First, your net earnings from self-­employ­ment are reduced by half of your total Social Security tax. This is similar to the way employees are treated under the tax laws, because the employer’s share of the Social Security tax is not ­considered wages to the employee.

Second, you can deduct half of your Social Security tax on IRS Form 1040. But the deduction must be taken from your gross income in determining your adjusted gross income. It cannot be an itemized deduction and must not be listed on your Schedule C.

If you have wages as well as self-­employ­ment earnings, the tax on your wages is paid first. But this rule is important only if your total earnings are more than $106,800. For example, if you will have $30,000 in wages and $40,000 in self-employment income in 2010, you will pay the appropriate Social Security taxes on both your wages and business earnings. However, in 2010, if your wages are $77,500 and you have $30,000 in net earnings from a business, you do not pay dual Social Security taxes on earnings more than $106,800. Your employer will withhold 7.65 percent in Social Security and Medicare taxes on your $77,500 in earnings. You must pay 15.3 percent in Social Security and Medicare taxes on your first $29,300 in self-employment earnings and 2.9 percent in Medicare tax on the remaining $700 in earnings.

Optional method

If your actual net earnings are less than $400, your earnings can still count for Social Security under an optional method of reporting. The optional method can be used if your gross earnings are $600 or more or when your ­profit is less than $1,600.

You can use the optional method only five times in your life. Your actual net must have been $400 or more in at least two of the last three years, and your net earnings must be less than two-thirds of your gross income.

Here is how it works:

• If your gross income from self-employment is between $600 and $2,400, you may report two-thirds of your gross or your actual net earnings; or
• If your gross income is $2,400 (or more) and the actual net earnings are $1,600 (or less), you may report either $1,600 or your actual net earnings.
• Effective tax year 2008 and after, the maximum amount reportable using the optional method of reporting will be equal to the amount needed to get four work credits for a given year. For example, for tax year 2009, the maximum amount reportable using the optional method of reporting would be $4,480 ($1,120 x 4).

Family business arrangements

Family members may operate a business together. For example, a husband and a wife may be partners or run a joint venture. If you operate a business ­together as partners, you should each report your share of the business profits as net earnings on separate self-employment returns (Schedule SE), even if you file a joint income tax return. The partners must decide the amount of net earnings each should report (for example 50 percent and 50 percent).

 

• Parents should pay.Arguments in favor of shelling out your hard-earned cash for a son’s or daughter’s higher education can be compelling. For one thing, college is a very expensive proposition these days. A year of undergraduate study at a private university can easily top $30,000 and public in-state schools can run over $12,000. Of course, if your student decides to get an advanced degree or go to medical or law school, he or she can run up a bill exceeding the cost of your home mortgage. Advocates of this point of view ask, “Do you really want to saddle your kid with that kind of debt so early in life?”They add that if your child ends up working to pay for college, that’s less time available for study and making friends. And, of course, friendships built in college (“social networking” in today’s parlance) can generate a wealth of opportunities for a future career. Also, by investing in tax-deferred 529 plans, parents can withdraw funds free from federal income taxes when it’s time for college.

• The child should take the responsibility.Others argue that covering the cost of your child’s college education should not be a priority. After all, they reason, your kid has a lifetime to pay back student loans, and making loan payments can generate a positive credit history. Advocates of this position also argue that kids who have to pay for their own tuition, books, and living expenses learn responsibility and value the investment that college represents. They may also point to tuition reimbursement plans provided by some companies or the military service option as a way to get a college education without breaking the bank.Folks on this side of the debate often argue that 529 plans are overrated as a savings vehicle because investment options can be limited and tax rules are likely to change, undermining future tax benefits. Finally, they reason that a person’s own retirement should take precedence over saving for a child’s education. “You can’t take out a loan for retirement,” they argue.

• Making the decision.Of course, your family’s dynamics, the importance you place on a college education, and your personal financial priorities will factor into this decision. If you’d like help looking at the pros and cons of this important issue, give us a call.

 

This mountain of unpaid debt has provided a wonderful business opportunity for debt collectors. Typically, credit card issuers will attempt to collect late payments for about six months. After that, they may outsource their collection activities to an agency or law firm that specializes in tracking down past-due accounts. If those parties are unsuccessful, the card issuer may write off the debt and sell it to a third party known as a “scavenger debt collector.”

These scavenger collectors typically pay 3¢ to 10¢ for each dollar of debt. Say, for example, you owe $1,000 to a credit card company. A scavenger agency might buy that debt for $60, then try to collect the entire outstanding balance. If successful, the return for these firms can be phenomenal: $1,000 (often plus interest and fees) for a $60 investment. Of course, most old debts are difficult or impossible to collect. That’s why such companies can purchase the debt so cheaply.

If debt collectors are pressuring you, know your rights. The Fair Debt Collection Practices Act (FDCPA) offers specific protections to consumers. For example, you have the right to ask a collector for written proof of the debt he’s trying to collect. You’re also allowed to dispute a debt you don’t think you owe, as long as you put your dispute in writing within 30 days of being contacted.

The FDCPA also places certain restrictions on the practices of debt collectors. They can’t contact you before 8 a.m. or after 9 p.m. (unless you agree), they can’t call you at work if they know your employer disapproves, and they can’t falsely imply that they’re attorneys or government representatives. Debt collectors are also barred from using profane language or harassing you by repeated telephone calls. They can’t threaten you with consequences that aren’t legal, falsely imply that you’ve committed a crime, misrepresent the amount of your debt, or state that you’ll be arrested if you don’t pay.

For more information about your consumer rights and debt collection laws, contact www.ftc.gov or your state’s attorney general.

 

For example —

• Wash sales. Thinking of selling a security before December 31 to take advantage of a capital loss? To make sure the loss is deductible, refrain from buying a substantially identical security during the 61-day period that begins 30 days before you sell and ends 30 days after.

• Worthless stocks. For capital loss purposes, securities with no value are treated as if you sold them on the last day of the year. Your loss is generally the same as your cost.

  If you want to deduct worthless securities on your 2010 return, you’ll need to prove the security became worthless during the year and that it truly has no value. Not sure you can meet those requirements? Selling before year-end may be a better option.

• Stock donations. Giving appreciated stock to charity lets you avoid capital gains tax and claim a charitable deduction.

  In order to deduct the donation on your 2010 return, the gift must be complete. For certificates you endorse and present directly, the date of mailing or other delivery is considered the date of the gift. When your broker or the issuing company handles the transaction, the gift is complete when the stock is titled to the charity.

Tax law changes that are scheduled to take effect in 2011, such as the increase in capital gains tax rates, may also affect your year-end investment planning. Please call us for more guidance in your year-end tax review.

 

Interest rates are at an historic low, but many homeowners find they cannot refinance because the value of their home has dropped to low and they don’t meet the equity requirements. If you are not late on your payments, HARP is the simplest way to refinance.

If you are already late or facing foreclosure due to hardship such as drop in income, and you qualify, HAMP can delay foreclosure while you are evaluated. If you are accepted, your monthly payment could be reduced to an amount that would allow you to make the payments.

Modification Program

HAMP was designed to let homeowners avoid foreclosure by subsidizing mortgage lenders’ modifications to borrowers’ home loans. To qualify for a HAMP modification, you must:

• Use the home as your primary residence
• Have a mortgage less than or equal to $729,750
• Have gotten your mortgage before January 1, 2009
• Have a housing payment including principal, interest, property taxes, HOA dues, and insurance that exceeds 31% of your gross (before tax) monthly income
• Have a documentable hardship — either a significant reduction in income or increase in expenses that was beyond your control
• Have a stable source of income sufficient to make a modified payment

You’ll have to document your income, debts, assets, and hardship before you can get a trial modification, and ultimately a permanent one. The average modification under this program saves homeowners about $500 a month.

Refinance Program

HARP was created to let creditworthy homeowners who are underwater (mortgage is greater than home’s value) on their mortgages refinance to the lowest available mortgage rates. You don’t have to be cash-strapped or at risk for foreclosure. To qualify for HARP, you must:

• Own a one- to four-unit home
• Have a mortgage that is owned or guaranteed by Fannie Mae or Freddie Mac
• Have no late mortgage payments (more than 30 days late) in the last 12 months
• Owe no more than 125% of the value of your home (on the first mortgage; combined loan-to-value ratio can be higher — only first mortgage is refinanced).

If you meet these criteria, contact your loan servicer about a HARP refinance. Only a servicer can tell you if you’re eligible, but you can go to any Fannie Mae or Freddie Mac lender for your refinance. However, if your application does not get approved from an automated underwriting service, you have to get your refinance  from your current servicer. In addition, using a different lender from your current one may make it difficult or impossible to get mortgage insurance coverage. If you have a second mortgage, you can still refinance a first mortgage of up to 125% of your home’s value — as long as the holder of the second lien agrees to subordinate it again to the new first mortgage.