Loan Forgiveness = Taxable Income?

So, you’re a master negotiator. You’re skills are on par with the best hagglers at the flea market and you know you can pretty much negotiate like a boss.  Knowing that, you decide that you are going to try and negotiate the amount of money owed to your bank. You go in for the kill and the bank wiped away your loan. Like magic the debt is gone! Celebrations are certainly in order but did you know the canceled debt may count as taxable income?

Need a little bit more of an explanation? Let’s talk this through. Suppose you had $10,000 in debt and with your ninja negotiating skills you were able to have the bank agree to wipe away $5,000 of that debt. Yay! Happy dances are in order because that’s half you don’t have to pay back.  While you no longer owe the bank you may owe the IRS. That $5,000 you saved is now considered taxable income. Think of it as the bank giving you the money to pay the loan back instead of just wiping it away.  

Now, suppose you don’t remember or not sure which forms you’ll need. The financial institution has its due diligence and will issue a 1099-C if the debt cancelled or forgiven is $600 or more. Please pay close attention to your year-end statements and summaries as your 1099-C may be included or not too far behind in the mail or inbox. Really… Don’t ignore this form. Bring it to my office so we can make sure to handle everything correctly. We are in the business of having everything taxes straight around here!  

I know what you’re thinking. “I’m 8 years in on a 10 year student loan forgiveness program. I have to claim the amount forgiven as income?” Guess what? If you have a federal student loan, no you do not! No need to stress. Make sure you are eligible for student loan forgiveness with your student loan provider. If the student loan is with a private lender most likely the debt will not be forgiven and even if it is you will still have to claim the cancelled debt as taxable income. With everything there is an exception or exclusion. Student loans are one and actually, there are a few other exceptions as well. 

The Mortgage Debt Relief Act of 2007 is a huge help to those who had their debt reduced through a restructured mortgage or if the loan was simply forgiven. This ACT was meant to help those who were personally victimized by the financial and housing crisis from 2007 to 2014. If this happened to you during in 2016 there is good news for you! The PATH Act extended this policy until the end of 2016. How awesome is that!?

Another exception to the rule is Title 11 bankruptcy. If you declared Title 11 bankruptcy the cancellation of debt is not counted as income. You’ve established in court and already paid plenty of money to go through the process of bankruptcy. The debt should not count and does not count. You’re covered and this is a great time to leverage any tax breaks you have to work on your financial fitness.

There are other exceptions and exclusions so you will definitely want to book an appointment to make sure your ducks are all in a row to file your 2016 taxes. Filing can be so much more than just a W-2 and I’d be more than happy to help you with your W-2, 1099-C, 1040, Schedule A, etc. I know. There’s too many numbers, letters and schedules! Take a deep breath because we got this.

Anyway, although it may feel like you are still paying for the debt if it is cancelled or forgiven think about it like this. Taxes possibly paid today as a result of canceled debt may save you a lot more money than if you had of paid the total balance of the debt plus interest and possibly fees. You’re still getting a great deal in the grand scheme of things so don’t get too caught up on this one. Like I said before… we got this!

Estimated Taxes. What’s That?

Did you know your taxes are due on January 17th? Yes, you heard me right. You have less than a month to get your taxes together. Okay, just kidding the laws are still the same and your 2016 taxes are due April 18th, 2017. BUT if you received any untaxed dollars during the fourth quarter of 2016 then I’m not kidding at all. You have to pay Uncle Same your fourth quarter estimated taxes. Let me explain.

Estimating your taxes for the quarter is just like when your employer pays you weekly, biweekly, monthly, etc. You’ll see subtracted from your gross pay is your health care costs, retirement plan payments and you guessed it, your taxes. You pay your taxes as you earn. You’ll find out if you’ve paid too little or too much when you file your taxes in the next year. Although this method is called withholding the same concept applies for your quarterly estimated taxes.

Now, you’re probably thinking in what situations would I pay estimated taxes. Well, there’s plenty. Let’s say you won the lottery for $15 million! You spent it on a new home, new car, invested a few dollars and then took me on a cruise to the Bahamas. Remember that trip? It was so much fun and we ate the best foods… Before we went on our trip you made sure to set aside how much of your new riches you needed to pay in taxes. Besides paying estimated taxes for lottery winnings, you may also have to pay if you’ve received income from self-employment, alimony, interest and any prizes like that car we won at the Oprah show.

Don’t be a rebel and try to pay it all at once now. The IRS wants their payments on a schedule. Each quarter is due on the 15th or next business day of January, April, June and September. You should aim to make equal payments in each quarter as well. If you don’t there could penalties and we do not want that! If you underestimate the amount owed you could be penalized as well.

How do you estimate how much you’ll owe in taxes? I knew you were going to ask so I got you. Most will simply use a form 1040-ES and their prior year’s taxes as a guide. Here’s the thing though. Let’s not pretend like the documents are simple and easy to use plus I want you to only worry about bringing in the income. I’ll take care of the form for you and come up with a plan to calculate and pay your taxes on time. Book an appointment on my calendar now before slots fill up and we’ll work together.

Speaking of how to pay your quarterly estimated taxes, it’s not hard to do at all. You can pay over the phone, by mail or electronically with the EFTPS. You can make one lump sum payment like a baller or break it up into weekly or biweekly payments. If you decide to do the latter just make sure that your calculations are correct and you’ll pay the appropriate amount every quarter. Better yet just come see me!

The biggest thing to remember is if you are receiving any form of income that is not being taxed before receipt then you must pay taxes on this income quarterly. Also, if you expect your total taxes due to be $1,000 or more then you need to estimate your taxes and pay as you earn. Last, don’t fall into the trap of spending all of the income received before paying the tax. Uncle Sam doesn’t care if you’re suddenly broke and can’t pay.

Business owners, independent contractors, those that live off interest and new lottery winners, its time to book your appointments with me for the New Year. I have time to work with you before the fourth quarter estimated taxes are due and the height of tax season. Get in where you fit in! Let’s make this the simplest thing you’ll do to start off 2017!

Why Giving is a Great Choice for Your Taxes

Did you know that you could save yourself some cash by giving to your favorite charities?  Say what?  Yes, seriously, by giving you can save.  What’s the saying?  “Good things come to those who give.”  Well, maybe the saying isreally about those who wait but in the case of your taxes this saying is absolutely true.  The great thing is your donation doesn’t have to be cash.  Charitable giving includes sponsorship of local charity events, in-kind contributions such as property and even your car. Let me tell you how it works.

Now, before you go giving your money to everybody, you have to make sure that your favorite charities and causes are qualified charitable organizations by the IRS.  That just means that the IRS recognizes them as legitimate organization that uses your money for the common good.  Here’s the list.  Now, if a local organization isn’t on this list it doesn’t mean that they aren’t making the world a better place; it just means that your gift may not count as a deduction on your taxes.  You can always book an appointment with me to discuss further so you can save money and contribute to your favorite organizations at the same time.

You’ll want to do your research to find out who and what you are funding.  Why is this important?  Well, its your hard earned money so you wouldn’t just throw it down the drain would you?  Like that time you bought those shoes you never wore.  I’m not judging but that’s what it would be like if you gave to an organization that was involved with lobbying.  For example, organizations can quickly disqualify themselves from being listed as a qualified charitable organization by urging supporters, volunteers and the public to vote for a specific candidate in exchange for funding.  We’re finishing up an election year so you definitely want to pull out your magnifying glass before giving.  Plus, the last thing you want to do is give your money to an organization that does not align with your beliefs without you even knowing.

Time is money but not in the case of claiming it on your taxes.  If you volunteer for an organization you cannot use your time as a form of charitable giving.  Don’t be sad about that though.  You should be volunteering out of the kindness of your heart plus there are many other benefits to volunteering that are not monetary such as networking, skill development and just being a better person on earth.

Whatever you do, make sure to gather your receipts for each donation you make throughout the year.  When its time to file your taxes I want you to come into the office and say in your best Love and Hip Hop character voice, “I have RECEIPTS!”  Keep a small folder in a safe place with all of your records or even scan them to create an electronic file.  Doesn’t matter which organization strategy you use as long as you got it all together.  In some cases this may mean you have to request receipts or documentation from the organization that received your donation.  Side note, anybody else hate when the cashier automatically assumes you don’t want your receipt? You can also keep copies of statements and cancelled checks as proof of giving.

If you want to deduct your contribution for 2016 then you have to give that gift by December 31st, 2016.  You might be all about a New Year, new you on January 1st but that gift you give because you’re trying to get your life right in the new year won’t qualify as charitable giving for your 2016 taxes.  You’ll have to wait until next year.  So, get on the ball and figure out which organizations you’ll want to bless within the next two weeks!

So, with that said you have two weeks to get on my calendar to discuss further and I don’t want to hear, “no,” for an answer.  Why?  Because, each tax story is different depending on your income, tax bracket, amount of charitable giving, etc.  You can search the Internet all day but you and I can work together to make sure you are going in the right direction with so little time left in the year.  Use the quick and easy schedule to book in minutes.

Giving can be beneficial in more ways than one and now you know that your taxes can be one of those ways.  So the next time you’re not sure what to do with your old car or before you throw away those old clothes in the closet, think about how much you could be earning just by donating those items.  See, you’re already doing these simple things throughout the year so take the extra step to document and claim those charitable gifts on your taxes!