Why the Holidays Are a Good Time to Sell  Your House

 

jersey-shore-real-estateWhen it comes to real estate, the ideal time to sell your home often falls in the spring months. After all, many people hunker down during the winter months or are too busy with the holidays to think about purchasing a new home. Not to mention that people like to start shopping in the spring to make sure they are settled in their home before the start of a new school year. But putting your house up for sale around the holidays has its benefits, granted you position your home right. Sure you may not get into a bidding war, but you are going to deal with serious buyers who are ready to pull the trigger.

There’s Less Inventory
Conventional wisdom says people should wait until the spring to get the most from a home sale. But studies have shown that homes listed around the holidays can not only command more money, but can also sell quicker than ones listed in the spring. One of the reasons is there is less competition during the holidays. For a multitude of reasons people won’t put their houses up for sale when the holidays are coming up, and so the ones shopping aren’t going to have dozens of houses to choose from. In the spring, inventory usually picks up, and price wars break out in coveted neighborhoods. But during the holidays, there will be limited choices which means a homeowner can have a higher asking price.

Buyers Are More Serious
Anyone who is shopping for a new home around Thanksgiving, Christmas or New Year’s is undoubtedly going to be a serious buyer. While hitting open houses is a favorite pastime for many Americans, they aren’t going to spend their precious time around the holidays seeing how the other half lives. In the spring, when open houses are a regular occurrence, people may check out homes without a clear plan to buy. If your house is up for sale in the winter and someone is looking at it, chances are that person is serious and is ready to pull the trigger. That can often result in a quicker sales process.

RELATED > 7 Ways To Get A Deal During Real Estate’s Off-Season

You Can Make the Home Warm and Cozy
The holidays are often a time when people gather around fireplaces, have hot chocolate and make nice smelling cakes and pies. For homeowners who put their house up for sale during the winter months, they can stage their house to give off the comfy and homey vibe that appeals to many home buyers. Some people may argue that showing a house in the winter is hard to do because there’s snow on the ground, the house is drafty and the curb appeal is lacking. But keeping the heat up, having a pie baking in the oven to give off a pleasant smell and keeping the sidewalk and driveway clear of snow and ice can boost a home’s appeal. Not to mention that buyers tend to be more emotional during the holidays and will make decisions based on the feeling a house conjures up. During the spring there is a lot more foot traffic in homes that are up for sale. Buyers may not be able to do a thorough walk-through, may get frustrated because of the number of people looking at it and can leave with a bad feeling about the home.

Timing Is Perfect for Transfers
The end of the year is typically the time when people get notified that they will be moving because of a job transfer. Those people are going to need a house sooner rather than later, and as a result will be hunting for a new home during the holidays. These buyers can’t wait for the spring, which is why listing during the holidays can get the home sold and sold quickly.

Your Neighborhood May Look More Appealing
One of the staples of the holiday months, particularly Christmas, is that many people adorn their homes with festive lights and decorations. That is also true of local communities where lit-up snowflakes and wreaths can be found on lamp poles and up and down the main streets. People purchasing a home during that time may see the neighborhood in a different light and may be more willing to consider an area that they may have been on the fence about.

End-of-Year Tax Breaks
Reducing the tax bill is not the main reason buyers purchase a new home, but it could be the reason serious buyers make a move during the holidays. That’s because if the home sale closes before Dec. 31, buyers can deduct the mortgage interest, property taxes and interest costs of the loan. The tax deductions can be significant and could prompt a home buyer to move during the holidays instead of waiting until the spring.

The Bottom Line
Nobody wants their home to languish on the market nor do they want to have to lower the price they are asking for. And while many fear that will happen if they list their home during the holidays, often that isn’t the case. When you sell your home during the holidays, you will face less competition, more serious buyers and a quicker sales process. It also presents a unique opportunities to create a warm and cozy environment that you can’t have in the spring or summer months.

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Best Practices for Paying Off Your Mortgage

It’s simple to pay off a mortgage earlier.  But should you?  It’s a complicated question.  

Let’s discuss why…

pay-off-mortgageFor many people, their mortgage carries an interest rate that’s lower than they could average in retirement or investment accounts. And that means the “extra” money you could throw at a mortgage might actually earn you a lot more elsewhere.

With a low mortgage interest rate, homeowners are “so much better off putting that money in a Roth IRA,” says Jill Gianola, CFP professional, author of “The Young Couple’s Guide to Growing Rich Together.”

Other financial pros agree. And if you have extra money and an employer that offers matching retirement contributions, that option might give you a higher return for your money than paying off a low-rate mortgage, says Eric Tyson, author of “Personal Finance for Dummies.”

RESOURCE: Start by using Bankrate’s mortgage calculator

Then there’s the college aid factor. If you’re applying for need-based aid for your kids, that home equity could count against you with some colleges, he says, because some institutions view equity as money in the bank.

If, after those caveats, you want to pay off your mortgage early, here are 4 ways to make it happen:

1. Pay an extra 1/12th every month
Divide your monthly principal and interest by 12 and add that amount to your monthly payment. End result: 13 payments a year.

IMPORTANT NOTE: Before you make anything beyond the regular payment, phone your mortgage servicer and find out exactly what you need to do so that your extra payments will be correctly applied to your loan.

Let them know you want to pay “more aggressively,” and ask the best ways to do that.

Some servicers may require a note with the extra money or directions on the notation line of the check.

And to confirm, if you’re putting extra money toward your loan, always check the next statement to make sure it’s been properly applied.

2. Refinance with a shorter-term mortgage
Want to make sure your mortgage is paid in 15 years? Refinance to a 15-year mortgage.

15-year mortgages often carry interest rates a quarter of a percentage point to three-quarters of a percentage point lower than their 30-year counterparts.

But this option is not quick or free. You must qualify for a new mortgage – which means paperwork, a credit check, and, likely, a home appraisal. Plus closing costs.

So do your research about refinance costs before jumping in… even with a lower interest rate, that quicker payoff means higher monthly payments. And this method is a lot less flexible. If you decide that you don’t have the extra money one month to put toward the mortgage, you’re locked in anyway.

Ultimately, unless the new interest rate is lower than the old rate, there’s no point in refinancing. Without a lower rate, you’ll get all the same benefits (and none of the extra costs) by just increasing your payment a sufficient amount.

3. Make an extra mortgage payment every year
12 months, 13 payments. There are a couple of ways to pull off this tactic. You can save up throughout the year and make an extra payment. Or, for those who get paid biweekly, harness part or all of those “extra” or “third” checks.

Get a bonus? A tax refund? An unexpected windfall? However it ends up in your hands, you can funnel some or all of your newfound money toward your mortgage.

The upside: You’re paying extra only when you’re flush. And those additional payments toward the principal will cut the total interest on your loan.

The downside: It’s irregular, so it’s hard to predict the mortgage payoff date. If you throw too much at the mortgage, you won’t have money for other needs.

So yes, whether you should pay off your mortgage early it’s a complicated question. But it does not mean without the proper research you can’t come to an answer.

YOUR TURN

Have you used any of the above methods to start paying your mortgage off early? What is working for you?

Join the conversation on Facebook, Twitter and LinkedIn.

And don’t forget to subscribe to the monthly Patrick Parker Realty email newsletter for articles like these delivered straight to your inbox!

From the Patrick Parker Realty Tax Season Blog Series:
7 Ways To Avoid An Audit
Reduce Your Chances of Getting A Second Look From The IRS with Tips From the Pros

tax-dayThat’s it… it’s here… Tax Day is the 15th!

It’s the 1% no one wants to be a part of: the share of Americans who get audited.

The Internal Revenue Service is tracking down people who may be shorting the tax man by understating their income, exaggerating tax breaks and skipping out on other tax liabilities. And it isn’t just the rich and famous that agents are going after. Six percent of the IRS audits conducted on individuals in 2012 were for people who made between $200,000 and $1 million, according to IRS data.

Taxpayers can get flagged for forgetting important forms, mixing up numbers and erroneously claiming tax breaks. Sometimes, one mistake can open the door for the IRS to take a closer look at the rest of the return, tax pros say. “You don’t want to go through that headache,” says Paul Gevertzman, a partner at Anchin, Block & Anchin, an accounting firm in New York City.

That said, most taxpayers can stay in the clear if they report their income honestly and have the proper documentation. And while there is no such thing as “audit-proofing” a return, taxpayers can take steps to reduce their chances of facing extra scrutiny from Uncle Sam.

Here are 7 things you can do to avoid getting audited:

1. Watch what you tweet
Tax officials don’t just scour public records in their efforts to catch tax cheats. They also check Facebook, Twitter and other websites for clues that a person may be lying about the scope of their business and how much they make.

For example, some tax officials may take note if a small business owner boasts online about business projects taking place in multiple states but doesn’t report that income to the IRS and the respective state tax authorities, says Gevertzman. Likewise, taxpayers who claim they are having financial difficulties in an effort to reduce the taxes they owe should not post on social media about how much business is booming.The IRS says audit decisions are based on the information taxpayers provide on their returns, not what they post on social media. The agency, however, might monitor publicly available information to help with an existing case. And agents are not allowed to use fake profiles or deceive people on social media sites to collect information.

2. Report all of your income
Most taxpayers know to report all income stated on their W-2 and 1099 forms, since the IRS has matching software that can help it catch income that was reported under a person’s Social Security number. But even less obvious income should be reported, tax pros say. This includes income earned by self-employed individuals that may not appear on a 1099 form. People should also report gambling winnings, which casinos must generally report to the IRS, says Melanie Lauridsen, a technical manager on the tax staff for the American Institute of Certified Public Accountants.

For instance, winnings of at least $1,200 from a bingo game or slot machine must be reported, according to IRS rules, as well as prizes of more than $5,000 from a poker tournament, though the requirements vary per game. (Gambling winnings can also be offset by losses if taxpayers can provide receipts and other documentation.) People also need to report prizes they don’t realize are taxable, like the baseball fan who catches a home run ball that could be worth hundreds or thousands of dollars, says Lauridsen. Any athletes bringing home medals from the Winter Olympics in Sochi may also have to face the tax man when they return.

3. Don’t mix business with pleasure
Self-employed taxpayers need to be careful when claiming tax breaks and writing off business expenses if they don’t want to get a double-take from the IRS. Taxpayers often forget, for instance, that only 50% of business meal and entertainment expenses can be deducted, and they must be identified as business costs. People looking to write off travel expenses should keep logs of business trips and visits made to clients to work-related travel costs from those incurred on personal trips. And even though the IRS has introduced a simplified option for claiming the home office deduction, the office still has to meet the main requirement of being used exclusively for business and of being the main place of business. That means that if the children are using the room to play games or watch TV, the office gets disqualified, says Lauridsen.

4. Pay your nanny taxes
Families who find they need to hire someone like a nanny or a home health aide may be more focused on their daily chores than the IRS, but the decision could come with added tax responsibilities. Such workers need to be reported properly to the IRS and families may need to pay Social Security and Medicare taxes and to withhold the worker’s share of those taxes just like any employer, says Stephanie Breedlove, vice president of Care.com HomePay, a company that helps families handle payroll taxes and labor law.

The rules apply to anyone who was paid more than $1,800 last year or $1,900 this year. Often, families don’t realize their error until they’ve parted ways with the nanny and he or she tries to file for unemployment benefits and state authorities learn the person was paid off the books, says Breedlove. Those families then need to pay any back taxes and penalties owed and could be found guilty of tax evasion, she says. Families should also avoid incorrectly listing the nanny as an employee of a small business they may own, which could lead to an exaggeration of business credits and deductions.

5. Exaggerating charitable deductions
Tax pros say that many taxpayers forget to write off furniture, clothing and other items they donate to charity. But claiming those items incorrectly or exaggerating their value could get a return flagged by the IRS. Clothes and home appliances must be valued at their thrift store prices and not their original sale prices, says Lauridsen of the AICPA.

“People have a tendency to be emotionally attached to their things so they have a tendency to over value them when they’re doing charitable contributions,” she says. Salvation Army and Goodwill offer guides to help donors determine the value of certain items. Pricier items like paintings, homes and land need to be appraised at the time of donation. Donated cars, which are likely to be sold by charitable organizations, will be valued based on the price that the group gets for selling the car.

6. Don’t try to write off hobbies
Some people may try to write off losses they’ve incurred from a side business like horse breeding or a small business making and selling hand crafted toys. But the IRS requires taxpayers to show they’re going into these ventures with the intention of making a profit. If they lose money year after year, the IRS prohibits taxpayers from using those losses to offset other income unless they can show they made a profit in at least 3 of the last 5 tax years, or 2 of the last 7 tax years.

The IRS also looks to see if taxpayers are making changes to try to make the venture profitable and if they depend on that income to live on. “ You’ve got to show why it’s still a business,” says Gevertzman. Those who don’t make a good case may be suspected of investing in the hobby solely for the purpose of creating a loss that could be used to reduce their tax bill—and they could owe penalties and interest for any taxes they underpaid in the past.

7. Go over the numbers one more time
This sounds like a no brainer but the IRS caught 2.7 million math errors on tax returns in 2012. Taxpayers often make mistakes when calculating how much they owe and how big their refunds should be. Those blunders can get the attention of the IRS, which scans for deductions that seem out of line with a person’s income, says Gevertzman. Some people who accidentally reverse numbers or make enter incorrect Social Security numbers and checking account information could also have their returns held up and their refunds delayed says Lauridsen of the AICPA. Many of these errors can be caught early or avoided through electronic filing. It also helps to use exact numbers, since rounded numbers may give the IRS reason to request more specific figures and documentation.

Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.

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The Patrick Parker Realty Tax Season Blog Series will cover many topics as they relate to real estate and increasing your income tax refund. Such topics will include Home Ownership Tax Breaks, Hidden Tax Deductions, Deductions on Mortgage Interest, Reporting on the Sale of Your Home, Home Purchase Tax Credits and more. In addition, our Blog Series will explore Tax Incentives as they relate to major transitions and lifestyles; Marriage, Birth, Divorce, Death of Spouse, Health Insurance, Caretaking of Dependents, Business Owners, Commuters and more.

Check in to The Patrick Parker Realty Blog each Tuesday, Thursday and Saturday through Tax Day for new posts. You can also follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.

More Info About The Patrick Parker Realty Tax Season Blog Series >
Tax Terms Glossary >
More Tax Aspects of Home Ownership >

For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.

The Patrick Parker Realty Tax Season Blog Series:
So You’ve Filed Your Tax Return. Now What?
Contributions by Miranda Marquit, Wise Bread

Finally!  You’re done filling out your tax return, and the IRS is pleased.

patrick-parker-real-estate-tax-tipsBut you’re not quite finished yet. To protect yourself in case something goes awry and the IRS asks to audit your return, you should keep and maintain reliable tax return records.

Keep Copies of Your Tax Return(s)
You should keep a copy of your current return, and all the documents that support it. This means that you should keep copies of receipts (including from charities), leases, 1099 forms, and other documents that back up your claims to deductions and credits. A file of tax documents, kept updated throughout the year, can ensure that you have everything you need each year.

Filing your latest return, though, doesn’t mean that you should get rid of previous years’ documents. The IRS can choose to audit a return three years back, so you should keep your tax return records for at least three years from the date your return was due.

If the IRS suspects you of some type of evasion attempt, you will need tax returns going further back than that. If your unreported income amounts to more than 25% of your gross, you need that return for six years after the filing date. If you have taken a deduction for a bad business debt, or for a worthless security, you should keep your tax return for seven years after the filing date.

The IRS web site also recommends that you keep your records indefinitely if you file a fraudulent return. There are also other rules associated with keeping employment tax records (four years after the due date employment tax is paid or becomes due) and filing a claim for a credit or refund after your return has already been filed (the later of three years after filing the original return, or after two years from when you paid the tax).

Most of the time, the IRS confines its audits to returns filed in the last three years from the date of filing. However, if you don’t have the proper documentation on those audits, or something is uncovered that alerts the IRS to the fact that you might not be reporting everything properly, your older tax returns will be called into question.

As long as you are careful only to claim income, losses, deductions, and credits that you have documentation to support, you should be able to clear up any misunderstandings with the IRS fairly easily, and not have to worry about how far back your tax return records go (beyond the three years for ordinary audits).

What If There’s a Mistake on Your Tax Return?
If you have already filed your tax return, and you realize that a mistake has been made, you will need to file an amended tax return (Form 1040X, along with supporting Forms and Schedules). You can file an amended return anytime within three years from when you filed your original tax return, or within two years from when you paid tax that you owed.

So far, Form 1040X still can’t be filed electronically. If you need to file an amended return, you will have to download the form from the IRS website (fortunately, you can fill out the form on your computer and print the hardcopy with your responses), and mail the form in, along with the appropriate documentation regarding the mistake you are fixing.

Keep Good Records
No matter the situation, you should keep good records. Keep all of your tax documents together in a safe place. You can scan them into a digital file if you don’t want bulky hardcopies taking up space. Just make sure you have a back up somewhere, just in case your original digital copy is destroyed.

The better your records, the less you have to fear from a tax audit – the greater your peace of mind.

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Follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.

Check back in with the Patrick Parker Realty Blog or sign up for the Patrick Parker Realty eNewsletter to have updates delivered to your inbox monthly.

The Blog Series will cover many topics such as How do I qualify for a home seller break?, How do I qualify for a home buyer break?, Do I have to report the home sale on my return?, What is the gain on the sale of my home?, What Are Home Renovation Tax Credits?, Deducting Mortgage Interest, Taking the First-Time Homebuyer Credit, How to Avoid Taxes on Canceled Mortgage Debt, Tax Incentives as they relate to Life’s biggest transitions, such as Marriage, the Birth of a Baby, Divorce, or the death of a Spouse and much more. New posts in this Blog Series will be published twice weekly. 

More info about the Patrick Parker Realty Tax Season Blog Series >

For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.

From the Patrick Parker Realty Tax Season Blog Series
Taxes and The Birth Of A Child

ppre-refundThe birth of a child is not just a blessed event; it’s the beginning of a whole new set of tax breaks for your family. Learn how the newest addition to your family can help trim your tax bill, and how to save for your child’s future in the most tax-efficient manner.

Get a Social Security number
Your key to tax benefits is a Social Security number. You’ll need one to claim your child as a dependent on your tax return. Failing to report the number for each dependent can trigger a $50 fine and tie up your refund until things are straightened out.

You can request a Social Security card for your newborn at the hospital at the same time you apply for a birth certificate. If you don’t, it can be a real hassle. You’ll need to file a Form SS-5 with the Social Security Administration, and provide proof of the child’s age, identity and U.S. citizenship.

If registering newborns strikes you as silly, keep in mind that the aim is to prevent taxpayers from claiming dependents they don’t deserve (think parakeets and puppies). Apparently, it’s working. In the first year the government required Social Security numbers, 7 million fewer dependents were claimed than the year before.

Dependency exemption
Claiming your son or daughter as a dependent will shelter $3,950 of your income from tax in 2014, saving you a quick $975 if you’re in the 25 percent bracket. You get the full-year’s exemption no matter when during the year the child was born or adopted.

$1,000 child tax credit
For 2014, a new baby also delivers a tax credit of up $1,000, even if the child was born late in the year. Unlike a deduction that reduces the amount of income the government gets to tax, a credit reduces your tax bill dollar-for-dollar.

The credit is phased out at higher income levels, and begins to disappear as income rises above $110,000 on joint returns, and above $75,000 on single and head of household returns. For some lower-income taxpayers, the credit is “refundable,” meaning that if it exceeds your income tax liability for the year, the IRS will issue a refund check for the difference. Don’t assume you can’t qualify for the refundable credit just because you didn’t qualify in prior years.

Fix your withholding at work
Since claiming an extra dependent will cut your tax bill, it also means you can cut back on tax withholding from your paycheck. File a new W-4 form with your employer to claim an additional withholding “allowance.”

For a new parent in the 25 percent bracket, that will cut withholding—and boost take-home pay—by about $75 a month.

Filing status
If you are married, having a child will not affect your filing status. But if you’re single, having a child may allow you to file as a head of household rather than using the single filing status.

That would give you a bigger standard deduction and more advantageous tax brackets. To qualify as a head of household, you must pay more than half the cost of providing a home for a qualifying person—and your new son or daughter qualifies.

Earned income credit
For a couple without children, the chance to claim the Earned Income Tax Credit (EITC) disappears when income on a joint return exceeds $20,020 in 2014. (For single filers the 2014 limit is $14,590.)

Child care credit
If you pay for child care to allow you to work—and earn income for the IRS to tax—you can earn a credit worth between $600 and $1,050 if you’re paying for the care of one child under age 13, or between $1,200 and $2,100 if you’re paying for the care of two or more children under 13. The size of your credit depends on your income and how much you pay for care (you can count up to $3,000 for the care of one child and up to $6,000 for the care of two or more).

Lower income workers with an Adjusted Gross Income of $15,000 or less can claim a credit of up to 35 percent of qualifying costs; the percentage gradually drops to a floor of 20 percent for taxpayers reporting AGI over $43,000.

Child care reimbursement account
You may have an even more tax-friendly way to pay your child care bills than the child care credit: a child care reimbursement account at work. These accounts, often called Flex Plans, let you divert up to $5,000 a year of your salary into a special tax-advantaged account that you can then tap to pay child care bills

Money you run through the account avoids both federal and state income taxes as well as Social Security and Medicare taxes, so it could easily save you more than the value of the credit. You can’t double dip by using both the reimbursement account and the credit. But note that while the limit for Flex accounts is $5,000, the credit can be claimed against up to $6,000 of eligible expenses if you have two or more children. So even if you run $5,000 through a Flex account, you could qualify to claim the 20 percent to 35 percent credit on up to $1,000 more.

Although you generally can only sign up for a Flex account during “open enrollment” in the fall, most companies allow you to make mid-year changes in response to certain “life events,” including the birth of a child.

Adoption credit
There’s also a tax credit to help offset the cost of adopting a child. For 2014, the credit is worth as much as $13,190. If you adopt a “special needs” child, you can claim the full credit amount even if your actual adoption costs are less. For 2014, this credit phases out as Adjusted Gross Income, rises from $197,880 to $237,880.

Save for college
It’s never too early to start saving for those college bills. And it’s no surprise the Congress has included some tax goodies to help parents save. One option is a Section 529 Education Savings Plan. Contributions to these plans are not deductible on your federal taxes, but earnings grow tax-free and payouts are tax-free, too, if the money is used to pay qualifying college bills. (Some states give residents a state tax deduction if they invest in their state’s own 529 Plan. Visit your state’s official website for details.) There are no income restrictions on 529 Plan contributions.

You may also want to fund a Coverdell Education Savings Account (ESA) for your newborn. Up to $2,000 a year can go into an ESA for each child. Again, there is no deduction for deposits, but earnings are tax-free if used to pay qualified education expenses. ESA money can pay for elementary and high school expenses (even a computer used for school and educational software), as well as for college costs. The right to contribute to an ESA phases out as income rises from $95,000 to $110,000 on single returns, and from $190,000 to $220,000 on joint returns.

Kid IRAs
You may have heard about Kid IRAs and the fact that relatively small investments when a child is young can grow to eye-popping balances over many decades. It’s true, but there’s a catch. You can’t just open an IRA for your newborn and start shoveling in the cash.

RELATED: Roth IRAs And Why You Should Open One

A person must have earned income from a job or self-employment in order to have an IRA. Gifts and investment income don’t count. So you probably can’t open an IRA for your newborn (unless, perhaps, he or she gets paid for being an infant model). But as soon as your youngster starts earning some money—babysitting or delivering papers, for example, or helping out in the family business—he or she can open an IRA. The phenomenal power of long-term compounding makes it a great idea.

A Roth IRA is an ideal choice for most kids who are in a low tax bracket, where a tax deduction is of little value. With a Roth IRA there’s no up-front tax break, but their savings will benefit from years of tax-free growth, and withdrawals in retirement are tax-free.

Kiddie Tax
So far, this article has had nothing but good news. But the Kiddie Tax unfortunately is not good news. Here is what you need to know:

The graduated nature of our federal income tax rates—with higher tax rates on higher incomes—creates opportunities for savings if you can shift income to someone (such as a child) in a lower tax bracket. But don’t try to pull any punches. For example, let’s say Dad has $1 million invested in bonds which pay $50,000 of taxable interest each year. As a resident of the 35 percent tax bracket, that extra income hikes his tax bill by $17,500. But if he could divvy up the money among his five children, each of whom earned $10,000, the money would be taxed in the 10 percent bracket and the family could save $12,500 in taxes, right? Nice try—but it won’t work.

To prevent such schemes, Congress created the Kiddie Tax to tax most investment income earned by a dependent child at the parents’ top tax rate. For 2014, the first $1,000 of a child’s “unearned” income (that’s income that’s not earned from a job or self- employment) is tax-free (thanks to the child’s standard deduction) and the next $1,000 is taxed at the child’s own rate (probably 10 percent). Any additional investment income is taxed at the parents’ rate—as high as 39.6 percent. Under current rules, the kiddie tax applies until the year a child turns 19 (or 24 if he or she is a dependent full-time student.)

Nanny Tax
The Nanny Tax is also not good news, but it’s fair. If you lawfully hire someone to come into your home to help care for your new child, you could become an employer in the eyes of the IRS—and face a whole new set of tax rules. If you hire your nanny or caregiver through an agency, the agency may be the employer and have to take care of all the paperwork. But if you’re the employer—and you pay more than $1,900 in 2014—you’re responsible for paying Social Security, Medicare and unemployment taxes for your caregiver, and reporting the wages to the caregiver and to the IRS on Form W-2.

Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.

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The Patrick Parker Realty Tax Season Blog Series will cover many topics as they relate to real estate and increasing your income tax refund. Such topics will include Home Ownership Tax Breaks, Hidden Tax Deductions, Deductions on Mortgage Interest, Reporting on the Sale of Your Home, Home Purchase Tax Credits and more. In addition, our Blog Series will explore Tax Incentives as they relate to major transitions and lifestyles; Marriage, Birth, Divorce, Death of Spouse, Health Insurance, Caretaking of Dependents, Business Owners, Commuters and more.

Check in to The Patrick Parker Realty Blog each Tuesday, Thursday and Saturday through Tax Day for new posts. You can also follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.

More Info About The Patrick Parker Realty Tax Season Blog Series >
Tax Terms Glossary >
More Tax Aspects of Home Ownership >

For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.

From the Patrick Parker Realty Tax Season Blog Series:
Save on Taxes: Filing Seperately As A Married Couple

ppre-refundIf you’re married, there are circumstances where filing separately can save you money on your income taxes.

The Internal Revenue Service considers wedded taxpayers married if they are legally married under state law, live together in a state-recognized common-law marriage, or are separated but have no separation maintenance or final divorce decree as of the end of the tax year.

Of the 56 million tax returns married couples filed in 2009, the latest year for which the IRS has published statistics (at the time of writing), 4.3 percent belonged to twosomes who filed separately. These partners reported individual income and expenses on individual tax returns. They had to agree on either itemizing expenses or using the standard deduction. By filing separately, their similar incomes, miscellaneous deductions or medical expenses likely helped them save taxes.

Filing separately with similar incomes
A couple may pay the IRS less by filing separately when both spouses work and earn about the same amount. When they compare the tax due amount under both joint and separate filing statuses, they may discover that combining their earnings puts them into a higher tax bracket. Their savings depends on a variety of other factors, however, including their investment situation and whether they have children. The “married filing separately” status cuts the deductions for IRA contributions and eliminates child tax credits, among other tax breaks.

Using miscellaneous deductions by filing separately
Miscellaneous deductions can lower taxable income, but in order to enter them on Schedule A, they must add up to more than 2 percent of adjusted gross income (AGI). Spouses with union dues, job-search costs, tax-preparation fees and unreimbursed business expenses may find their miscellaneous deductions don’t qualify when their higher combined income raises their AGI. A spouse who travels frequently for business could rack up a sizable tally in airline fees for baggage and itinerary changes that makes the miscellaneous deduction worth pursuing.

Filing separately to save with unforeseen expenses
Adjusted gross income also determines if a couple can use unreimbursed health care costs and casualty losses on Schedule A to save taxes. Unless out-of-pocket medical expenses exceed 10 percent of AGI, they don’t qualify as a deduction. Casualty losses must also total more than 10 percent of AGI. The spouse with the loss or substantial medical outlay calculates deductibility against his own, lower AGI when he and his partner file separate returns. When one spouse can lower taxable income this way, married filing separately might trim a couple’s overall tax burden.

RELATED: The Affordable Care Act and Taxes

There is a temporary exemption from Jan. 1, 2013 to Dec. 31, 2016 for individuals age 65 and older and their spouses. If you or your spouse are 65 years or older or turned 65 during the tax year you are allowed to deduct unreimbursed medical care expenses that exceed 7.5% of your adjusted gross income. The threshold remains at 7.5% of AGI for those taxpayers until Dec. 31, 2016.

Filing separately to guard the future
When you don’t want to be liable for your partner’s tax bill, choosing the married-filing-separately status offers financial protection: the IRS won’t apply your refund to your spouse’s balance due. Separate returns make sense to prevent the IRS from seizing a spouse’s refund when the other has fallen behind on child support payments.

Couples in the process of divorcing may shun joint returns to avoid post-divorce complications with the IRS, while a spouse who questions her partner’s tax ethics may feel more comfortable living a separate tax life.

RELATED: Taxes and Divorced of Seperated Individuals

Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.

_____________________________________________________________________


The Patrick Parker Realty Tax Season Blog Series will cover many topics as they relate to real estate and increasing your income tax refund. Such topics will include Home Ownership Tax Breaks, Hidden Tax Deductions, Deductions on Mortgage Interest, Reporting on the Sale of Your Home, Home Purchase Tax Credits and more. In addition, our Blog Series will explore Tax Incentives as they relate to major transitions and lifestyles; Marriage, Birth, Divorce, Death of Spouse, Health Insurance, Caretaking of Dependents, Business Owners, Commuters and more.

Check in to The Patrick Parker Realty Blog each Tuesday, Thursday and Saturday through Tax Day for new posts. You can also follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.

More Info About The Patrick Parker Realty Tax Season Blog Series >
Tax Terms Glossary >
More Tax Aspects of Home Ownership >

For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.

From the Patrick Parker Realty Tax Season Blog Series:
Tax Implications: Converting A Second Home Into A Primary Residence

ppre-refundAlthough the rule that allows homeowners to take up to $500,000 of profit tax-free applies only to the sale of your principal residence, it has been possible to extend the break to a second home by converting it to your principal residence before you sell. Once you live in that home for two years, you have been able to exclude up to $500,000 of profit again. That way, savvy taxpayers can claim the exclusion on multiple homes.

Note: Congress has clamped down on this break for taxpayers who convert a second home into a principal residence after 2008. A portion of the gain on a subsequent sale of the home will be ineligible for the home-sale exclusion, even if the seller meets the two-year ownership-and-use tests.

The portion of the profit subject to tax is based on the ratio of the time after 2008 when the house was a second home or a rental unit, to the total amount of time you owned it. So if you have owned a vacation home for 18 years and make it your main residence in 2013 for two years before selling it, only 10 percent of the gain (two years of nonqualified second home use divided by 20 years of total ownership) is taxed. The rest would qualify for the exclusion of up to $500,000.

Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.

_____________________________________________________________________


The Patrick Parker Realty Tax Season Blog Series will cover many topics as they relate to real estate and increasing your income tax refund. Such topics will include Home Ownership Tax Breaks, Hidden Tax Deductions, Deductions on Mortgage Interest, Reporting on the Sale of Your Home, Home Purchase Tax Credits and more. In addition, our Blog Series will explore Tax Incentives as they relate to major transitions and lifestyles; Marriage, Birth, Divorce, Death of Spouse, Health Insurance, Caretaking of Dependents, Business Owners, Commuters and more.

Check in to The Patrick Parker Realty Blog each Tuesday, Thursday and Saturday through Tax Day for new posts. You can also follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.

More Info About The Patrick Parker Realty Tax Season Blog Series >
Tax Terms Glossary >
More Tax Aspects of Home Ownership >

For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.

From the Patrick Parker Realty Tax Season Blog Series:
Tax Tips for Short Sales

ppre-refundUnderstanding how a short sale or restructure will be viewed by the Internal Revenue Service can help you plan your tax situation ahead of time.

If you are in a position where you have to sell your house for less than the amount you owe on it or have to restructure your mortgage with the lender in order to avoid foreclosure proceedings, you may face tax implications on the transaction. Understanding how a short sale or restructure will be viewed by the Internal Revenue Service can help you plan your tax situation ahead of time.

What is a short sale?
A short sale happens when you sell your property for less than what you owe on its mortgage(s). A short sale has to be approved by your lender because it will not receive the full amount of the outstanding loans.

After the sale, the loan will still have an unpaid balance, called the deficiency. Depending on the lender and the laws of your state, a short sale can result either in you owing the deficiency to the lender as unsecured debt, or in the lender forgiving the deficiency. A short sale is often negotiated as an alternative to foreclosure, as it often involves fewer costs and fees.

MORE INFO: The Mortgage Forgiveness Debt Relief Act and Debt Forgiveness

Tax implications of forgiven debt
If your lender forgives the balance of your mortgage after the short sale, you may not be out of the woods yet. You may have to include the forgiven debt as taxable income in the year of the short sale. The Mortgage Forgiveness Debt Relief Act of 2007 exempted that income through 2014 from taxation, up to $2 million, if it was your principal residence, or main home. However, the tax still applies to second or vacation houses as well as rental properties. Beginning in 2015, the exemption is no longer available unless it is reinstated.

Mortgage restructuring
Before seeking a short sale or being forced into a foreclosure, you may be able to negotiate a mortgage restructuring to allow you to stay in your home and to be more able to afford your mortgage’s terms and interest rate. These types of loan modifications can take many forms and may include:

• Reduced interest rates
• A reduction of the loan principal
• Stretching out the payments over a longer time frame to make payments smaller

Of these options, only a principal reduction may have income tax implications. The principal reduction may be considered taxable income to you in the year of the restructure. If the property is your main home, it will fall under the provisions of the Mortgage Forgiveness Debt Relief Act and will be excluded from taxable income.

Dealing with incorrect 1099-C forms
If your lender has reduced or eradicated your debt under a short sale or mortgage restructure, it will send you IRS Form 1099-C at the end of the year, showing the amount of the debt forgiven and the fair market value of the property. Review the document carefully and compare it to your own figures. If it contains misstatements, contact the lender and attempt to have it correct the form. If it is not able, or not willing, to do that in a timely manner, recalculate the correct figures and provide the IRS with documentation showing how you arrived at your figures when you file your income tax return.

Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.

_____________________________________________________________________

The Patrick Parker Realty Tax Season Blog Series will cover many topics as they relate to real estate and increasing your income tax refund. Such topics will include Home Ownership Tax Breaks, Hidden Tax Deductions, Deductions on Mortgage Interest, Reporting on the Sale of Your Home, Home Purchase Tax Credits and more. In addition, our Blog Series will explore Tax Incentives as they relate to major transitions and lifestyles; Marriage, Birth, Divorce, Death of Spouse, Health Insurance, Caretaking of Dependents, Business Owners, Commuters and more.

Check in to The Patrick Parker Realty Blog each Tuesday, Thursday and Saturday through Tax Day for new posts. You can also follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.

More Info About The Patrick Parker Realty Tax Season Blog Series >
Tax Terms Glossary >
More Tax Aspects of Home Ownership >

For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.

 

From the Patrick Parker Reaty Tax Season Blog Series:
10 Energy-Related Home Improvements and Taxes

Note: The content of this article applies only to taxes prepared for 2010. We are offering it for reference only. As your tax advisor for more information.

ppre-refundHomeowners have a variety of financial incentives to “go green.” There are improvements, small and large, that can make your home more energy-efficient while also saving you money and taxes.

Go Green and Earn Green
The American Recovery and Reinvestment Act of 2009 tripled the financial incentives for making repairs that can significantly reduce your utility bills and contribute to a “green” environment, while helping you save money on taxes.

The incentives take the form of tax credits, which reduce the amount of tax you owe dollar-for-dollar. Moreover, you can claim the credits whether or not you itemize deductions on your federal income tax return. They are available to owners of existing homes through 2010.

Here are 10 eligible home improvements you can make to reduce the transmission of heat and cold, thereby using less energy in your home:

1. Insulation
2. Energy Star exterior doors and windows, including skylights
3. New metal or asphalt roof with appropriate pigmented coatings or cooling granules
4. Electric heat pumps
5. Electric heat pump water heaters
6. Approved central air-conditioning
7. Approved natural gas, propane or oil water heaters
8. Approved natural gas, propane or oil furnace or hot water boilers
9. Advanced main air circulating fans
10. Biomass stoves using “plant-derived” fuel such as agricultural crops, wood pellets, grasses, etc

Meeting Standards
The legislation also tightened performance and quality standards for energy-efficient technology.

Although the federal government website refers taxpayers to Energy Star information (see www.EnergyStar.gov), not all equipment with the Energy Star label qualifies for these credits. Look for the manufacturer’s Tax Certification Statement, either on the manufacturer’s website or on the product packaging, and keep it with your tax records.

Available Tax Credits
For improvements made by December 31, 2010, the credit is 30% of the purchase price and the overall cap on the available credit is $1,500 over both 2009 and 2010.

Spend as little as $5,000 before the end of 2010 on qualifying energy-saving home improvements and you can cut $1,500 from your 2010 federal income tax bill.

To qualify, you must own the home and use it as your principal residence. If you previously claimed the $500 credit available before 2009, you may now make additional energy-focused home improvements and qualify for the entire $1,500 credit.

Depending on where you live, you may also qualify for state and local tax incentives, ranging from tax credits and installation rebates to property tax reductions. Several states provide credits for energy-efficient renovations. Many local utilities offer cash rebates for purchasing energy-efficient equipment. These incentives are in addition to any federal tax incentives you receive.

Residential Alternative Energy Credit
As a separate category, there are tax credits for devices designed to generate energy from alternative sources. These credits may be applied to all homes, including both existing homes and new construction and to principal residences and vacation homes. In calculating your costs for these items, consider both the purchase price and the labor costs associated with installation.

For the 2010 tax year, a nonrefundable tax credit equal to 30% of the full cost may be taken for:

Solar hot water heaters
Geothermal heat pumps

There is also a 30% credit for each:

Half kilowatt of electric capacity generated by a wind turbine—to a maximum of $4,000 per year (previously capped at $500 per half kilowatt)

And there is a 30% credit, to a maximum of $500 per year, for each:

Half kilowatt of electric capacity from fuel cell plants

Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.

 

_____________________________________________________________________

The Patrick Parker Realty Tax Season Blog Series will cover many topics as they relate to real estate and increasing your income tax refund. Such topics will include Home Ownership Tax Breaks, Hidden Tax Deductions, Deductions on Mortgage Interest, Reporting on the Sale of Your Home, Home Purchase Tax Credits and more. In addition, our Blog Series will explore Tax Incentives as they relate to major transitions and lifestyles; Marriage, Birth, Divorce, Death of Spouse, Health Insurance, Caretaking of Dependents, Business Owners, Commuters and more.

Check in to The 
Patrick Parker Realty Blog each Tuesday, Thursday and Saturday through Tax Day for new posts. You can also follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.

More Info About The Patrick Parker Realty Tax Season Blog Series >
Tax Terms Glossary >
More Tax Aspects of Home Ownership >

For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.

 

 

From the Patrick Parker Realty Tax Season Blog Series:
Deducting Mortgage Interest FAQs

ppre-refundIf you’re a homeowner, you probably qualify for a deduction on your home mortgage interest. The tax deduction also applies if you pay interest on a condominium, cooperative, mobile home, boat or recreational vehicle used as a residence.

It pays to take mortgage interest deductions
If you itemize, you can usually deduct the interest you pay on a mortgage for your main home or a second home, but there are some restrictions.

Here are the answers to some common questions about this deduction:

1. What counts as mortgage interest?
2. Is my house a home?
3. Who gets to take the deduction?
4. Is there a limit to the amount I can deduct?
5. What if my situation is special?
6. What types of loans get the deduction?
7. What if I refinanced?
8. What kind of records do I need?

What counts as mortgage interest?
Mortgage interest is any interest you pay on a loan secured by a main home or second home.

These loans include:

• A mortgage to buy your home
• A second mortgage
• A line of credit
• A home equity loan

If the loan is not a secured debt on your home, it is considered a personal loan, and the interest you pay usually isn’t deductible.

Your home mortgage must be secured by your main home or a second home. You can’t deduct interest on a mortgage for a third home, a fourth home, etc.

Is my house a home?
For the IRS, a home can be a house, condominium, cooperative, mobile home, boat, recreational vehicle or similar property that has sleeping, cooking and toilet facilities.

Who gets to take the deduction?
You do, if you are the primary borrower, you are legally obligated to pay the debt and you actually make the payments. If you are married and both you and your spouse sign for the loan, then both of you are primary borrowers. If you pay your son’s or daughter’s mortgage to help them out, however, you cannot deduct the interest unless you co-signed the loan.

Is there a limit to the amount I can deduct?
Yes, your deduction is generally limited if all mortgages used to buy, construct, or improve your first home (and second home if applicable) total more than $1 million ($500,000 if you use married filing separately status).

You can also generally deduct interest on home equity debt of up to $100,000 ($50,000 if you’re married and file separately) regardless of how you use the loan proceeds.

For details, see IRS Publication 936: Home Mortgage Interest Deduction.

What if my situation is special?
Here are a few special situations you may encounter.

• If you have a second home that you rent out for part of the year, you must use it for more than 14 days or more than 10 percent of the number of days you rented it out at fair market value (whichever number of days is larger) for the home to be considered a second home for tax purposes. If you use the home you rent out for fewer than the required number of days, your home is considered a rental property, not a second home.
• You may treat a different home as your second home each tax year, provided each home meets the qualifications noted above.
• If you live in a house before your purchase becomes final, any payments you make for that period of time are considered rent. You cannot deduct those payments as interest, even if the settlement papers label them as interest.
• If you used the proceeds of a home loan for business purposes, enter that interest on Schedule C if you are a sole proprietor, and on Schedule E if used to purchase rental property. The interest is attributed to the activity for which the loan proceeds were used.
• If you own rental property and borrow against it to buy a home, the interest does not qualify as mortgage interest because the loan is not secured by the home itself. Interest paid on that loan can’t be deducted as a rental expense either, because the funds were not used for the rental property. The interest expense is actually considered personal interest, which is no longer deductible.
• If you used the proceeds of a home mortgage to purchase or “carry” securities that produce tax-exempt income (municipal bonds) , or to purchase single-premium (lump-sum) life insurance or annuity contracts, you cannot deduct the mortgage interest. (The term “to carry” means you have borrowed the money to substantially replace other funds used to buy the tax-free investments or insurance.).

What kinds of loans get the deduction?
If all your mortgages fit one or more of the following categories, you can generally deduct all of the interest you paid during the year.

• Mortgages you took out on your main home and/or a second home on or before October 13, 1987 (called “grandfathered” debt, because these are mortgages that existed before the current tax rules for mortgage interest took effect).
• Mortgages you took out after October 13, 1987 to buy, build or improve your main home and/or second home (called acquisition debt) that totaled $1 million or less throughout the year ($500,000 if you are married and filing separately from your spouse).
• Home equity debt you took out after October 13, 1987 on your main home and/or second home that totaled $100,000 or less throughout the year ($50,000 if you are married and filing separately). Interest on such home equity debt is generally deductible regardless of how you use the loan proceeds, including to pay college tuition, credit card debt, or other personal purposes. This assumes the combined balances of acquisition debt and home equity do not exceed the home’s fair market value at the time you take out the home equity debt.

If a mortgage does not meet these criteria, your interest deduction may be limited. To figure out how much interest you can deduct and for more details on the rules summarized above, see IRS Publication 936: Home Mortgage Interest Deduction.

What if I refinanced?
When you refinance a mortgage that was treated as acquisition debt, the balance of the new mortgage is also treated as acquisition debt up to the balance of the old mortgage. The excess over the old mortgage balance is treated as home equity debt. Interest on up to $100,000 of that excess debt may be deductible under the rules for home equity debt. Also, you can deduct the points you pay to get the new loan over the life of the loan, assuming all of the new loan balance qualifies as either acquisition debt or home equity debt of up to $100,000.

That means you can deduct 1/30th of the points each year if it’s a 30-year mortgage—that’s $33 a year for each $1,000 of points you paid. In the year you pay off the loan—because you sell the house or refinance again—you get to deduct all the points not yet deducted, unless you refinance with the same lender. In that case, you add the points paid on the latest deal to the leftovers from the previous refinancing and deduct the expense on a pro-rated basis over the life of the new loan.

What kind of records do I need?
In the event of an IRS inquiry, you’ll need the records that document the interest you paid. These include:

• Copies of Form 1098: Mortgage Interest Statement. Form 1098 is the statement your lender sends you to let you know how much mortgage interest you paid during the year and, if you purchased your home in the current year, any deductible points you paid.
• Your closing statement from a refinancing that shows the points you paid, if any, to refinance the loan on your property.
• The name, Social Security number and address of the person you bought your home from, if you pay your mortgage interest to that person, as well as the amount of interest (including any points) you paid for the year.
• Your federal tax return from last year, if you refinanced your mortgage last year or earlier, and if you’re deducting the eligible portion of your interest over the life of your mortgage.

Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.

_____________________________________________________________________


The Patrick Parker Realty Tax Season Blog Series will cover many topics as they relate to real estate and increasing your income tax refund. Such topics will include Home Ownership Tax Breaks, Hidden Tax Deductions, Deductions on Mortgage Interest, Reporting on the Sale of Your Home, Home Purchase Tax Credits and more. In addition, our Blog Series will explore Tax Incentives as they relate to major transitions and lifestyles; Marriage, Birth, Divorce, Death of Spouse, Health Insurance, Caretaking of Dependents, Business Owners, Commuters and more.

Check in to The 
Patrick Parker Realty Blog each Tuesday, Thursday and Saturday through Tax Day for new posts. You can also follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.

More Info About The Patrick Parker Realty Tax Season Blog Series >
Tax Terms Glossary >
More Tax Aspects of Home Ownership >

For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.

 


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