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The Tax Club Investigates: Investing in Tax Liens

Friday, April 30th, 2010

The younger generation is banking on the economy rebounding by investing in the time to invest is here and people from the age of twenty-five to sixty-five are looking to pick the perfect strategy. stocks, bonds, and 401k plans offered by employers while older professionals are using their best judgment by investing in real estate and self directed IRAs. Choosing the correct investment strategy can be the difference between a happy or frustrating retirement. One overlooked investment strategy that is applicable in many states is tax liens. This strategy allows people to purchase liens on houses to own them outright or gain a state mandated yield to release the lien. Purchasing tax liens can be a good investment strategy that can be used by younger and older generations to take advantage of the struggling economy.

Before one can purchase a tax lien one must understand a tax lien. When a property owner is late on paying real property taxes, the county or municipality will issue a tax lien on a person’s property. The lien allows the county or municipality to gain some of the money owed on the property since they are not gaining any money from the property’s owner. Certain states allow the tax lien to become a first lien on the property, which is then turned around and sold at auction as a tax lien certificate. Why spend hundreds of thousands of dollars on a brand new home or property when one can spend under twenty thousand dollars on a tax lien. Most people ask “if these auctions are such a good deal then how come I have never heard of them”? Auctions are generally attended by bank representatives and upper class investors but most of the auctions are open to the public depending on the laws for the state. Unfortunately, finding the place and time for these auctions is not so easy. Attendees usually pay upwards of $150 to be placed on a mailing list for the year that releases the information or spend extensive time contacting county court houses and other avenues to obtain information. Even though research can be extensive or costly it is a small price to pay to obtain a highly valued property at a low price.

Since the county is determined to obtain the taxes owed on the property, bids usually start below what is owed. After placing a successful bid, buyers of a government-issued tax lien certificate will then get either a state mandated yield on the lien or the title to the property. The state mandated yield must be paid by the delinquent tax payer to the release the lien and turns into a profit for the investor. If the delinquent tax payer is unable to pay the state mandated yield, in the amount of time set forth by the jurisdiction, the investor gets the title to the property. Once the investor has the title to the property they can strike a deal with the delinquent taxpayer or foreclose on the property. 75% of the auctions result in the existing owner paying the mandated yield allowing the action winner to gain substantially on their investment quickly. A fixed percentage rate mandated by a government agency or the title to property at a substantial discount are incredible benefits rarely seen with other real estate investments.

Even though tax liens seem like a perfect investment strategy, a lot of research must go into the process. First, investors must find out which states allow citizens to attend the auctions and what are the fees and taxes assessed on the auction winner. Next, one must find out when and where these auctions will take place. You can pay to be put on mailing lists or spend time and effort obtaining information from the county of your choosing. Subsequently one should go to a few auctions to see how the proceedings work before jumping right into action. Gain an understanding of how the program is carried out so you will feel comfortable in the audience and atmosphere. Next, one must research the lots on the docket. Take time to see the properties and the neighborhoods in which they are located. This will give you an idea of the value of the property and gain a sense of what the lot may be worth down the line. The last and most important step is to be patient. As an investor you do not want to get stuck with a house or property in poor or unsellable conditions. Make the most of the research and time put into every endeavor.

Tax liens can be a good way to get a highly valued house or property at a low price. Time and effort must be used to research the right property but the benefits can be better than any other real estate endeavor. It might be worth considering taking advantage of the economy and trying to make the most of your investment with tax liens.

Tags: government, property, tax liens, Taxes
Posted in Uncategorized | 3 Comments »

The Tax Club Investigates: When It Comes to Taxes, Don’t Bet on the Software

Wednesday, April 21st, 2010

Recently, a company that makes tax preparation software sponsored a poker game on national late night television. The contestants ended the game by opening up envelopes holding their returns and being surprised at their refunds. A man with a green visor was the dealer, and he wore the company’s logo on his shirt. The point seemed to be, “See? Doing your taxes and seeing the outcome is just like poker!” It may seem like an apt comparison. However, for these sorts of companies, the poker gimmick is not just for fun and games: it’s a necessary angle of advertising.

Poker is a game of luck, because your odds of walking away with the money depend a whole lot on the cards you can’t possibly predict. Anyone who figures out a way to calculate those cards reliably is banned from the game. Though professional players have devised strategies to deal with the unpredictability of the game, anyone who knows the rules can lose or win big. These software companies benefit enormously by making taxpayers think they won their return in a similar manner. After all, why try to plan next year’s refund, or get the advice of a real live accountant, when the chips could fall anywhere?

In reality, preparing your return is a game of strategy, more like chess than poker. It’s a game that is played during each month of the year, not in the three months of tax season following the year’s end. Now that tax season is over, here are some easy tips on how to optimize next year’s refund.

Begin with making contributions into your retirement account such as a traditional or Roth IRA. An Individual Retirement Account, or an IRA, is a bank or brokerage account that allows one to set aside money each year for retirement. It’s a win-win choice, one that your accountant and your future self will much appreciate. The best part is that it is deductible “above the line”, which means you don’t even need to itemize your deductions to take advantage of the benefits. However, consult with your accountant first and let them make the decision on how much you can contribute. Your accountant will need to consider other factors such as your income level and whether you are covered by your employer.
Converting your IRA to a Roth. Generally, the goal is to defer taxes to future years but with the impending increase in the income tax rates, it makes better sense to convert your retirement account to a Roth this year. There are no income limitations to Roth conversions and you are given the option to defer the tax on this over a two-year period. However, consult with your accountant first if this action will benefit you taking into consideration your personal tax situation.
Increase your itemized deductions by documenting your charitable donations. For example, if you and your family are moving, why not donate any furniture or clothes you won’t keep? Make sure you ask for a receipt from the charitable organization you made the donation to. Holding on to that receipt ensures that you will see your charity rewarded. If you are looking to buy a new car this year, consider donating your old one. In order for your contributions to be deductible, make sure the organization receiving the donation is a qualified institution accepted by the IRS.
Keep track of your medical expenses. And not just the obvious ones! Glasses, fertility treatment, hospital services, lab fees, and glucometers all count. You can even deduct the cost of parking and transportation to and from your doctor’s office, or the cost of capital expenses for medically-related home improvements. Be sure to keep a mileage log to support the miles driven for medical purposes though. And speaking of home improvements…..
Make your home more energy efficient. If you are thinking of updating your windows, doors, roofs, or heating/cooling systems, check out which choices will give you the most credits at EnergyStar.gov. There are some important energy tax credits available that will help you get some tax savings and they are set to expire at the end of this year. Not only will you get more money back next year when you file your taxes, you will also save more on your electric bill as well.
Get a personalized tax plan. Schedule an appointment with your accountant and go over the strategies you can implement to save more in taxes. It is best to have a tax plan in writing so you can refer to it throughout the year. Having a written plan produces a higher probability that your goals will be achieved efficiently. More often than not, those taxpayers who owed money on their returns do not have a tax plan or strategy in place that would have prevented them from owing in the first place. Taxpayers with a written plan save money and get better refunds at the end of year.
Qualifying the sale of your home for tax exclusion. Did you know you can exclude all or part of the profit from the sale of your main home? Yes, you are reading this correct. This exclusion is up to $250,000 for individuals and $500,000 for married taxpayers filing a joint return. In addition, this is not a once in a lifetime event, the exclusion can be claimed each time you sell your main home but generally not more than once every two years. In order to qualify, you must meet the Ownership Test and the Use test as provided for in the tax code. The ownership test requires that you must have owned the home for at least two years in the five year period ending on the date of the sale and the use test requires that you must have lived in the home for at least two years during the five year period that you have owned it. Before placing your home on the market, be sure you meet the above IRS requirements so you do not have to pay taxes on the gain from the sale.

So remember, your return is not a card game, and your refund is not in chips. It is a reward for carefully planning your finances throughout the year. To keep you on track, do not substitute a trained accountant with a program you install April 1^st and uninstall April 16^th. Now that would be a true gamble with dire consequences. There are many more ways to optimize your finances this year, and one of our professionals would be happy to talk to you about them. For a free consultation, call the Tax Club at 888-773-7176.

Tags: IRA, Roth IRA, Taxes
Posted in Uncategorized | 5 Comments »

The Tax Club Investigates: Who is Paying Federal Income Taxes?

Wednesday, April 14th, 2010

Federal income tax is the government’s largest source of revenue making April 15^th one of the most dreaded days of the year in America. With the tax deadline being tomorrow many Americans are moving swiftly to file their taxes on time to avoid penalty. Nobody enjoys paying taxes but it comes as a necessity for living in this society. “All I have to do is pay taxes and die” is a saying used by many Americans because those are two things in life that are inescapable. Even though April 15^th is the most dreaded day of 2010, most U.S. households will not pay any federal income taxes for 2009 due to tax credits and tax cuts.

Over the last few years tax credits have benefited families with low and middle yearly income. A family of four with two children under the age of 17 and a household income of $50,000 will not owe any income tax for 2009. The struggling economy from 2007 to 2008 led political leaders to assist low and middle income families get through the tax season. In 2008 and 2009 President George W. Bush and President Barrack Obama signed laws expanding and creating tax credits. President Bush signed a law in 2008 that provided millions of families with rebate checks of between $300 and $1,200. Some argue these rebate checks were to small but they did assist many families struggling toward the end of 2008. In 2009 President Obama’s economic recovery law targeted middle and low income families directly increasing chances of tax credits and refunds. In addition, President Obama continued to make strides toward creating an even playing field by providing more tax breaks for all those in need. “The Making Work Pay credit provides as much as $800 to couples and $400 to individuals”. Obama then created specific laws that assisted people with Children under the age of 17. The expanded child tax credit provides $1,000 for each child under the age of 17 and the Earned Income Tax Credit provides up to $5,657 to low income families with at least three children.

President Barrack Obama appears to be using tax cuts and tax credits to assist the lower and middle class Americans. Many argue the moves Obama has made make him look socialist in nature as he attempts to raise the foundation of the lower classes and decrease the intake of the upper classes. Obama’s argument the whole time has been that wealthy Americans thrived during the years of President Bush with big tax breaks. Now is the time for the average American to gain assistance from a struggling economy that is trying to rise back to true form. However, Obama has laid down some laws that are beneficial to all classes. The President created tax credits for college expenses which allow people to gain some reward for sending their children to college. In an effort to boost the economy the President has also created credits for buying a new home encouraging millions of Americans to trust in the economy and rely on a stable mortgage and future. Americans with existing homes are encouraged to go green by earning tax credit for energy efficient renovations to windows, doors, furnaces and other appliances. Many of these credits are refundable which means if the credits exceed the amount of income taxes owed, the tax payer will receive a check from the government for the difference.

According to the Tax Policy Center 49% of households did not pay federal income taxes in 2008. The increase in tax cuts and tax credits along with the struggling economy will lead to 47% of households being exempt from paying federal income taxes this year. Continued assistance to lower class families has the potential to lead to more households being exempt from paying federal income taxes in the near future. One might ask if less people are paying federal income taxes, how will this affect the economy?a

Ohlemacher, Stephen. “47% Of Families Don’t Pay a Dime in Federal Income Tax.” Seattle Times. Seattle Times, 07 Apr. 2010. Web. 09 Apr. 2010. <http://seattletimes.nwsource.com/html/nationworld/2011551281_notaxes08.html>

Tags: credits, federal income tax, Taxes
Posted in Uncategorized | 12 Comments »

The Tax Club Investigates: Understanding S-Corporations

Wednesday, April 7th, 2010

Corporations are not limited to professionals with unlimited resources and knowledge about the infrastructure about business. Most people do not realize that there are many types of entities beyond partnerships and sole proprietorships. The sub chapter S-corporation is a commonly used business in the United States due to the benefits that it presents to shareholders and officers. Even though S-corporations have special payroll and shareholder requirements, the entity is still popular among people that are looking for special tax advantages. Having the right business entity can help a business owner be successful and prolong the life of the business.

Corporations are established by filing Articles of Incorporation or Certificates of Incorporation with the state which they reside. The business is governed and protected by the state where it operates business. Organizational Minutes and By Laws describe how the business will operate and shares of stock represent ownership in the company. The shares are not publicly traded but they can be sold by the owner in exchange for ownership in the business. However, business owners should consult a financial advisor before engaging in such a transaction. The business must register with the IRS by obtaining a Federal Employer Identification Number shortly after becoming incorporated. The FEIN acts as a social security number for the business and must be used on all tax and legal forms for the business. Corporations are automatically C-corporations unless they elect to be taxed as an S-corporation by the IRS. The election to be taxed as an S-corporation must be made within seventy-five days of becoming incorporated or within seventy-five days of the new year. This election takes place when a business files Federal Form 2553. The 2553 Form is an election to have a C-corporation taxed as an S-corporation.

The S-corporation provides liability protection for all the shareholders creating a separation between individuals and the entity. The business is not subject to self employment tax since the reasonable salary paid to employees is subject to FICA taxes and the rest of the distribution is subject to income taxes. The IRS allows shareholders of S-corporations a tax advantage if their business is operating a loss. If the business is running a loss, each shareholder can deduct his or her share of loss on the individual tax return to the extent of their basis. Each shareholder receives a schedule K-1 when the corporate tax return is completed which reports each shareholder’s share of the corporate income or loss and includes the information in his or her individual tax return. The S-corporation reports its gross income, expenses, balance sheet and shareholder information but does not pay corporate income taxes. Depending on the state the S-corporation might not even be subject to state franchise taxes. These are taxes paid to the state for owning and operating a business in the state. States such as Massachusetts, New Jersey, and California can charge more than $400 a year in franchise taxes. However, states such as Georgia North Carolina and South Carolina charge between $10 and $50 for business running a loss. S-corporations present many advantages to business owners entering the corporate environment for the first time and give them the protection professionals need to start a corporation.

There are some drawbacks to having an S-corporation. A proper payroll system must be in place for the business which calculates a reasonable compensation to be documented and paid to officers and shareholders. Secondly, appropriate tax withholdings must be made and tax deposits must be submitted in a timely fashion leaving a small margin for error. Payroll can be complicated so business owners usually hire a professional to keep their books and handle payroll appropriately. Paid professionals will understand state unemployment insurance and will be able to meet quarterly and annual payroll filing requirements. Paying for proper payroll services may be expensive, but having a proper system in place is priceless. Along with a strict payroll system the S-corporation also has strict requirements when it comes to shareholders. The S-corporation can only have up to 100 shareholders and shareholders can only be U.S. citizens, permanent residents, estates, or trusts. This stipulation controls the amount of people involved in the business and the types of entities that can hold shares. The shareholders also must maintain corporate minutes. All decisions made for the business must be properly documented and voted on by the shareholders. The shareholders and officers are obligated to hold annual and quarterly meetings to speak about the direction of the business and can face legal tribulations if the minutes are neglected. The documented minutes are usually sorted through when owners sell shares, claim bankruptcy, dissolve the business, or split up. Minutes are usually hard to keep for shareholders who live in different states or for people who are not organized with their corporate documents. Companies with only one shareholder need to keep minutes as well but these meetings are a lot easier.

The S-corporation can be a good choice for people looking to start small corporations with legal protection and tax benefits for their shareholders. Even though the entity has some drawbacks, it gives individuals the opportunity to succeed in the long run with their dreams. To learn more about the S-corporation and to see if it is the right entity for you, contact the professionals at The Tax Club for a free consultation 888-773-7176.

Tags: business entity, corporations, s-corporation
Posted in Uncategorized | 14 Comments »

The Tax Club Investigates Inbound and Outbound Marketing

Tuesday, March 23rd, 2010

Today America is thriving in the age of technology. Computers allow people to download music, communicate with people from all over the world, and purchase products and services based on wants and needs. New technology allows people to surf the internet with their phones, personal organizers, and wireless personal computers. Due to the capabilities of the internet and the convenience of new technology more professionals are engaging in e-commerce businesses. E-commerce businesses consist of the buying and selling of products or services over electronic systems such as the internet and other computer networks. Although online retail can be very profitable it can also be very risky. The key to running a successful online business is to understand the importance of inbound and outbound marketing.

Shopping from the comfort of one’s own home has been a luxury that more consumers have been enjoying every year. Online retail sales are projected to be over $300 billion dollars in the next five years due to popularity and convenience. Products such as clothing, electronics, and household goods are purchased at the click of a button and delivered to a customer’s front door. When starting an e-commerce business you must conduct thorough market research as part of the inbound marketing process. Professionals need to identify who their potential buyers are and what products these buyers are eager to purchase. This information will allow a business owner to optimize how their customers will access products and services on a daily basis. Once the general concept of the products and services have been decided upon, one must find out how much consumers are willing to pay for the product. Professionals must create a price analysis that considers the cost to make, conduct, or provide the product or service. Business owners need to be satisfied with their bottom line to understand where their business is presently and where they want it to go in the future. Next, one must create a competitors analysis. This analysis will allow a small business owner to create a website where they design and describe products better than their opposition. Consumers will then be more inclined to purchase from the organization rather than the opposition due to the products unique value and presentation. Successful inbound marketing will be the difference between an e-commerce business that flourishes from the start and one that struggles immediately.

Equally important to inbound marketing is outbound marketing. Now that all the market research has been completed, you have enough knowledge to advertise and promote the product or service being offered by the company. Sales campaigns can be used to encourage people to shop regularly or buy more products. This will keep customers interested and encourage more action on your website. Using marketing avenues such as radio, newspaper, or online networks may be used to draw attention to your product or service as well. However, please understand that these avenues can cost a sufficient amount of money. If you decide to engage in these direct marketing tactics, be sure to use market research to optimize your options. While advertising and promotions focus on the product or service, public and media relations should be focused on the entire organization. Make sure the business has a good reputation and work diligently to gain customer feedback. Exercising outstanding customer service and keeping customers satisfied can be the key to extending the life of the business during difficult stretches. The best ways to stay in business is to have high customer retention and to have your most frequent clients refer new customers. Outbound marketing delivers the message of the business to the customer and puts the business owner in a position to sell products and become profitable.

Through the next ten years e-commerce will continue to flourish as the best way to get products and services quickly and easily. New entrants to the industry focus on outbound marketing before thoroughly exploring inbound marketing which leads to business failure. Effective inbound marketing often leads to less difficult outbound marketing which allows a business owner to break into the e-commerce industry and prosper easily and often.

Tags: ecommerce business, marketing, the tax club
Posted in Uncategorized | 7 Comments »

The Tax Club Investigates: The Importance of Proper Record Keeping

Wednesday, March 17th, 2010

In the middle of tax season everyone is trying to meet deadlines and provide their accountants with the necessary information to file returns accurately. However, this task can be daunting for individuals that have not properly kept records for themselves or their business. Financial statements, receipts, invoices, and proof of transactions must be accurately kept over the life of the business. Unfortunately people do not know what needs to be documented, how to document expenses, or why proper documentation is important. Recording proper expenses such as traveling, vehicle, and meals and entertainment expenses can result in not being audited and lead to a beneficial tax return.

Keeping track of traveling expenses can be very beneficial to a business owner. The IRS, bookkeepers, and accountants need to see everything in writing before deductions can be taken and returns can be accurately filed. When taking a business trip be sure to document the purpose of the trip, who you are going to be meeting, and the exact duration of the trip. Documenting this information legitimizes the travel as a business expense and gives financial consultants the information they need to reduces the chance of an audit. However, the business owner must be savvy when distinguishing between business and personal travel. If you travel to a destination and engage in both personal and business activities, you can deduct your traveling expenses to and from the destination only if the trip is primarily related to your business. Trips that are primarily personal in nature will not be able to be claimed as traveling expenses. However if some business activities take place on a personal trip, you may be able to claim particular expenses you incur at the destination. Through proper documentation of time, primary purpose, and attendees the opportunity will be created for the IRS and accountants to deem the expense deductible.

Another expense that needs to be documented correctly when dealing with travel is vehicle expenses. A person looking to account for vehicle expenses must keep a mileage log to track the miles used for the business. The vehicle log must display the date, destination, purpose of the trip, and the number of miles driven for the business. Accountants will then be able to apply one of two methods. The standard mileage method allows a person to deduct 55 cents per mile. This method must be used the first year the car is available for use in the business and the method can be changed in following years. The actual mileage method will allow people to deduct the business portion of the vehicle expenses such as: tires, oil/gas, registration fees, licenses, insurance, maintenance, repairs, and depreciation. Once this method is used, the standard mileage method can no longer be applied in the following years. The car must be owned by the owner for this method to be put into use. Incorrectly using either of these methods or not actually having a mileage log may result in an audit by the IRS.

The next important item that is most commonly recorded incorrectly is meals and entertainment expenses. Business owners often find themselves in positions where they would like to entertain a customer or future client. Depending on the client or the venue these costs can become very substantial over time. Properly documenting meals and entertainment can lead to deducting 50% of the cost. Ordinary activities such as lunch, baseball games, or concerts fall into the realm of meals and entertainment if the activity is business related. If you are trying to make a sale to a client and you take him to a Yankees game to complete the sale then the deduction can be made. Once again a receipt must be kept and proper documentation must be prepared in regards of whom you met with, what was discussed, what was the purpose of the meeting, and what the business relationship was with you and all those in attendance. Properly recording such events allows a business owner to take part in exciting venues, entertain clients for future sales or business and claim deductions.

Keeping proper records allows business owners to present themselves confidently if an audit occurs. Records need to be kept for as long as 7 years if at some point you file a claim for a loss from worthless securities or bad debt deductions and as little as three years after you file a claim for credit or refund. Accurately recording expenses and transactions may be a hassle over time but if kept correctly they can result in more profitable business returns and a successful business.

Tags: Deductions, recordkeeping, tax returns
Posted in Uncategorized | 7 Comments »

The Tax Club Investigates: Effective Business Planning

Thursday, March 11th, 2010

Every small business owner has dreams of making their company a huge success. Unfortunately, creating a successful business cannot be accomplished overnight or with little effort. The preparation that goes into a business before it actually gets started can make a difference. Before a business owner can sell products and services, they must define their goals. The goals of the business must then be assigned a realistic timeline which will allow the business to prosper and succeed at a steady rate. These can be outlined in a well drawn business plan. A concrete business plan provides the foundation for an efficient and organized company. It will house the company’s executive summary, marketing strategy, and operational and financial plan.

The executive summary is the perfect start to a business plan. The summary allows the business owner to develop a general company description and initial snap shot of the business. Even though the executive summary is created in the initial stages of the business, it needs to be powerful. The ingredients should capture the attention of lenders and business partners and give business owners more confidence in what their business offers. Products and services need to be described in detail and appear unique compared to other businesses. The ready to market product or service will eventually gain attention from consumers, partners, and professional organizations.

Once the executive summary is created, a proper marketing strategy needs to be developed. If a marketing strategy is not thought out or organized, a business can fail in a short period of time. The marketing strategy needs to define the competition and identify the areas of the market that the business will be embracing. Outlining competitors and understanding market niches allows business owners to sustain themselves in the market and provide products and services that consumers can appreciate. Other areas of the marketing strategy will contain market research and support material. The information in this area will act as a library for ideas and fundamental reasoning for market engagement.

Enable to take full advantage of the market one must understand how their business operates. The operational plan will vary from business to business depending on the type of entity that is created and the types of products or services offered. Generally, the plan will identify product and service development and how it will be maintained and serviced over the initial years of the business. Eventually this plan will invite small business owners to spot glaring weaknesses and make changes when necessary. The operational plan will also outline how the business will function. Information on ownership, investors, and directors are usually kept in Minutes and By Laws or Operating Agreements. The plan goes beyond this information by displaying an organizational chart and providing information for founders, key advisors, and hired salaries.

The last key attribute of a well structured business plan is the financial analysis. Since the business has not officially started, business owners should make projections. Income and cash flow statements should be created on a quarterly or monthly basis for three to five years while balance sheets should be created on an annual basis for three to five years. These statements will allow a business owner to see if the business is exceeding or falling short of expectations over time. Information of this nature allows owners to make marquee decisions on the direction of their establishment. Showing assumptions, developing a break even analysis, and estimating financial ratios and statistics can become the bottom line in realizing how effective one needs their business to be over time.

The business plan outlines the structure of the company and the direction it will be heading. Even though a business plan is created during the initial stages of a business, it can be changed over time. Understanding the products and services, market, structure, and financial obligations of the business will make you a savvy business owner. Creating an efficient business plan will not always lead to success but it will reduce the chance of failure by optimizing ideas, measuring performance, and increasing profits.

If you would like a free consultation on how to implement any of The Tax Club’s blog’s strategies or advice, please give us a call at 866-840-1829 x5438

Tags: business plans, entrepreneur, Small Business
Posted in Uncategorized | 9 Comments »

The Housing Bubble and Ensuing Mortgage Crisis

Monday, March 1st, 2010

The mortgage crisis caused the country and partially the world to go into a recession. Why did it happen and how does it affect you and who do we blame? During the 90’s administration, banking laws were deregulated thus allowing banks to act as investment banks. Instead of banks just lending money and making interest, they could now invest in all sorts of different investment activities. The situation did not seem bad at the time but increasingly became a critical ingredient to a perfect storm for a financial meltdown.

Next the banks started to Securitize the loans. Securitizing a loan is when a bank provides mortgages to lots of people. The bank then groups the loans together, any amount, and sells them to investors in parts or shares. Now all the banks had to do was find a person who needed a mortgage to buy a house or wanted to refinance. They would issue them a mortgage and then be able to sell it. They also could hold it so it would look great on their financial statements. On their balance sheets, it would look like a strong asset and on the income statement the bank would show large amounts of mortgage interest income.

The bank structure and the securitizing of loans made it great to be a mortgage broker. A broker is an intermediary between the lender and the borrower and would try to find the borrower a loan and get a commission. While brokers searched for loans, the banks in competition with each other to originate loans increased causing banks to loosen their terms and conditions. First, putting down 15% instead of the normal 20% was okay. Next, 10% was plenty, and then a person could borrow 105% of what the property was worth. Even though you would pay a higher interest rate, 7-8% became cheap enough. People were able to take out lots of money from a refinance, or buy that Mansion they always wanted. Builders kept on building because people kept buying. Then, banks started lending with no income verification. If you had a decent credit score, you could get a loan. All a person had to do was sign a paper saying they were making whatever the bank wanted to hear.

Let’s assume I am buying a house for $500,000 and I cannot afford the $3,000 a month payment on the $500,000 house I just purchased (assuming a fixed rate of 6% over 30 years). No problem! The banks will only require me to make interest payments. As a bonus the bank will give a rate of about 2% for the first two or three years. Now I can pay $840 a month for the mortgage on the house. The house sounds great until two or three years later when principal needs to be paid and the interest rate jumps up 5 percent or more at one time.

Many Americans could not afford these large jumps and as a result people faced foreclosure. In a lot of cases the loans were not interest only. In some cases there were adjustable rate mortgages where the rate automatically jumped up after an introductory period of anywhere between two and seven years.

Somebody needs to take the blame. How could banks be so liberal with their loans? Easy! Bank executives were the ones cashing in on the bonuses because the incomes of the banks were so high. They were making a quick profit at the expense of building long term wealth. An employee with Washington Mutual bank had threatened to go to the Federal Government and Securities and Exchange Commission to expose the situation, but employees with this knowledge eventually decided against being a whistle blower because of fears of retribution or losing their jobs.

Now let us look at the mortgage brokers. The broker’s job is to sell the loan. That resulted in some brokers not telling people everything they should know about the loan. An example of this is when people would get an adjustable rate mortgage where it had a low promotional rate for the first 3 years but then automatically when up by 5% or more. The broker would say it became adjustable but would leave out the part about the jump. Unless the borrower read the fine print, they were in for a surprise. Brokers are paid by “points,” (a point is 1% of the loan value). They would then encourage people to borrow more than they could afford in order to raise their commissions. Another very illegal tactic that the brokers would do is falsifying documents. It was not uncommon for brokers to create pay-stubs or tax returns for clients to show more money than they actually made. Most lenders now require people to sign forms allowing them to verify the income with the IRS. If you found crooked enough brokers, there was no limit to the forgery and or fraud that existed.

Home owners can share in the blame as well. People wanted to borrow as much money as they could to get the best house possible figuring their income would only go up. Everybody wants to do the best for themselves and their family, but people were not realalistic. Soon principle and interest payments were due and the rates had adjusted to an amount that could not be controlled. The only area of concern was getting into the house as soon as possible.

When a loan goes into default and a house or other real estate property goes into foreclosure a bank has to send several legal notices to the home owners in an attempt to get the mortgage up to date. If payment is not made, the bank will become the owner of the house. In general, if the loan cannot be repaid, the borrower will eventually lose the house. In Long Island, New York a judge in foreclosure case actually ruled that a couple was no longer responsible for their mortgage of around $500,000. The reason he cited was the lenders complete disregard for the couple who took out the mortgage. While this will probably be overturned on appeal, this does send out a very harsh message to banks. In an appeal the court will only look at the application of law by the judge in the initial case and will not make rulings on the circumstances of the case. In this situation the bank will not help the couple who took out the mortgage. The likely result of will be banks becoming more flexible and compassionate toward lenders. The federal government has also been encouraging banks to refinance people’s loans in order to make it easier on people. Unfortunately only around 85,000 people have taken advantage of this out of the 50 million plus mortgages in this country. One of the reasons why so few people took advantage is because people who really struggled but paid their bills on time were either not eligible or not offered help.

In an effort to fix the mortgage mess Congress had to get involved. While they were not directly bailing out people in trouble I do believe it was necessary to bail out the banks. If one of the large banks failed it would have had catastrophic results. Many more people would have lost their jobs and all the investors in those institutions would have lost all of their investments. The situation would have had a ripple effect on the market that would have made the recession much more serious than it already was and is currently.

The problem has a solution as do most problems. On the loan side more needs to be required from potential borrowers. Interest only loans should be only issued in rare cases to people with outstanding track records. Those types of loans should also only be given to people with proven track records. The adjustable rate mortgages should not be given out to anybody including “subprime borrowers,” who are borrowers with credit scores below 620. This way there is no chance of the payment jumping up to the point where the loan is no longer affordable. Thirdly, people should be required to put down a substantial amount of money; at least 10% plus closing costs. The more money put down would give people more of a financial interest and the banks a little cushion in case the market does take a dip. If these procedures are done along with legitimate verification of loan documents, the system would be more efficient. The house prices also would not go up as high or as quick because less people would be able to bid as high as they were able to during the buying frenzy. Right now as the markets begin to recover housing prices are getting more stable. Even with all these procedures foreclosures are still inevitable but the percentage of loans in foreclosure will drop.

If you have been foreclosed upon, there are things you can do to fight back from a financial perspective. If you are in dire straits, start to prioritize. Cut expenses such as: cable, going out to eat, and entertainment. Do not spend any more money on paying off your credit cards since the debt is unsecured debt which means the credit card companies cannot take your house, car, boat or other possessions in order to satisfy the debt. Your credit score will suffer tremendously but when you are in this position your credit score matters less. Next, if income is very limited, stop making car payments. One can always find a cheap-older model car that will get you from point A to point B. All money should be going toward your house, food and medical expenses. You can even stop paying property taxes before you stop paying the mortgage. A city or state foreclosing for unpaid property taxes takes years and that can give you a reprieve if you are looking for new employment. Before you stop paying the taxes contact an attorney and understand the laws for your local jurisdiction. You will still be responsible for the taxes but if you can defer the payments it may be the way to go for now.

This country has had a tough time with the financial mess but it does present lots of opportunities for people. If you are looking to buy a house right now, you can get it for a lot less then what people were paying for it two years ago. Investors can also take advantage because there are a lot of houses on the market at reasonable prices and plenty of room to negotiate. Rents have also gone down so if you have had the unfortunate circumstance of being foreclosed upon, you may be able to live easier paying less in a rented space. Don’t forget the $8,000 first time home buyer credit the government is offering.

Tags: finance, loans, mortgages
Posted in Uncategorized | 36 Comments »

The Tax Club Investigates: What to Do When You Get an IRS Notice

Tuesday, February 23rd, 2010

The first thing most people do when they receive a notice from the IRS is freak out. A notice from the IRS does not necessarily mean that you or your tax preparer did anything wrong. The most important thing to remember is to not panic.

Make sure you read the notice carefully to determine the issue. If after reading the notice you are unsure what it says, then call the number in the upper right hand portion of the notice to speak to an IRS official who will be able to help you. Once you determine the issue, gather all relevant documents and tax returns and review the paperwork.

The worst course of action is to do nothing. Do not just ignore the notice—the IRS will not forget about the issue and your problems could increase.

After determining what the notice is about, then you will have to act accordingly. If the notice is proposing changes to your return and you agree with the changes, you do not need to respond to the IRS. If you disagree with the changes, you should respond to the IRS by the reply by date on the notice and explain what items you take issue with. The notice should have an address where to send your reply. Make sure that you save any copies of correspondence with the IRS for your files.

If you use a professional tax preparer, contact them immediately and give them a complete copy of the notice. Most likely, the professional will be able to research and resolve the issue fairly quickly. If you do not have a paid preparer, consider contacting one for help with dealing with any issues that you do not fully understand.

We here at the Tax Club are committed to assisting you with any or all of your tax issues. Please contact us for a free tax consultation at (866)840-1829 x5438

Tags: IRS Notices, tax returns, Taxes
Posted in Uncategorized | 13 Comments »

The Tax Club Investigates: Health Savings Accounts

Wednesday, February 17th, 2010

Health Savings Accounts are really a combination of a health insurance policy meeting minimum US Treasury policy design requirements called a High Deductible Health Plan (HDHP) and a separate custodial savings account for future medical expenses called a Health Savings Account (HSA). A health insurance company or an insurance plan usually provides the qualified health insurance policy. A licensed HSA administrator and financial services company, such as a bank, usually acts as the custodian and administers the savings account portion of the HSA.

The HSA is an account into which you can deposit pre-tax money to be used for future medical expenses. It’s like a savings account, but with an HSA the money can only be used to pay for medical expenses. The money in an HSA is owned and controlled by you, not your employer, health insurer or anyone else. If funds are only used for medical expenses, withdrawals are tax-free.

You can start a health savings account on your own through a bank or other financial institution, or your employer may offer a health savings account option.

To qualify for a health savings account, you must be under age 65 and purchase a HDHP which means that the insurance doesn’t pay for the first several thousand dollars of health care expenses. This unpaid portion of expenses is known as a deductible. Some high-deductible plans do cover preventive services, such as mammograms, before the deductible is met, so check your plan’s coverage details carefully.

This HDHP must be your only health insurance coverage, and you can’t be covered by other health insurance. However, you can have a policy covering a specific disease such as cancer, one providing a fixed payment for hospital coverage such as a daily benefit, or you can have one that provides supplemental accident, disability, dental, vision or long-term care benefits

You can use your HSA funds to pay deductible expenses, copays associated with the plan, and other noncovered health care expenses.

One thing to consider very carefully is what medical expenses are covered by your high-deductible plan. If you receive care for something that’s not covered by your high-deductible health insurance plan, the cost likely won’t count toward your deductible. .

The dollar amount of the deductible that qualifies as a HDHP changes each year, usually in step with inflation. In 2010, the minimum deductible for a single person is $1,150 and $2,300 for a family. Of course, you can select plans with a higher deductible, as a way to reduce insurance premiums.

On the other end, to qualify as a HDHP, the insurance must limit your out-of-pocket expenses to $5,800 for a single person and $11,600 for a family in 2010.

If your employer offers a high-deductible insurance plan, you may be able to deposit money into an HSA on a pretax basis. If you open an HSA on your own, you can deduct your contributions, up to a maximum of $3,000 for individuals and $5,900 for a family during 2010. There is a $1,000 “catch-up” provision if you are age 55 or older and the limits are indexed for inflation. Contributions are tax-deductible, like a Traditional IRA, for the individual even if the taxpayer does not itemize deductions on their tax return.

There are a couple of other factors to consider. For example, you are allowed a one-time rollover from a Health Reimbursement Arrangement (HRA) or a Flexible Spending Account (FSA) into your HSA, as well as a one-time rollover from an IRA into your HSA. In addition, amounts are no longer pro-rated by the month you start the plan. You can now make the full year’s contribution even if you start as late as December.

If your employer contributes for your plan, the total of your employer’s contribution plus your contribution still must be within contribution limits.

Summary for HDHP and HSA in 2010

	Single	Family
Minimum Deductible to be a HDHP	$1,200	$2,400
Maximum Out-of Pocket to be a HDHP	$5,950	$11,900
Maximum Contribution to HAS	$3,050 (1)	$6,150 (1)

(1) If age 55 or older, an additional $1,000 contribution is permitted.

Unspent money in your HSA can be rolled over each year. Money put into an HSA is yours and can be taken with you if you switch jobs or retire, unlike a Flexible Spending Account. Also, it’s important to know that in most cases you can’t have both an HSA and a Flexible Spending Account.

All withdrawals for medical expenses are tax free, regardless of your age. Funds can be used for any family member’s eligible medical expenses even though HSA accounts are individual accounts.

Withdrawals for nonmedical expenses prior to age 65 are subject to income tax and a 10% penalty. Withdrawals for nonmedical expenses at age 65 or older are subject to income tax, but avoid the 10% penalty.

What becomes clear, an HSA is not a “one size fits all” type of product. You will need to consider a wide range of factors, such as your family’s health, policy coverage and costs, and your tax situation to see if the HSA makes sense for you.

Tags: finance, health savings accounts, medical expenses
Posted in Uncategorized | 17 Comments »