5 Questions to Decide Whether to Pay Down Debt or Save

It can be hard deciding whether to prioritize paying down debt or putting money into savings – especially if you have limited resources. Answering five key questions can help you allocate your funds.

1. Do you have high-interest debt?

Interest rates on credit cards are often high. That can cost you considerably over time, since credit card interest typically accumulates faster than what you can earn on savings.

RELATED: How Much Will Paying Off Credit Cards Improve My Credit Score?

Pay it down!

If you’re carrying debt with double-digit rates, it may make sense to prioritize paying it down so you can free up future funds to save or pay other debts.

2. Do you have an emergency fund?

emergency-fund

An emergency fund provides cash you can draw on in case of:

  • Unexpected car or home repairs
  • Medical emergencies
  • Essential costs like rent and groceries if you are laid off or out of work

Save it up!

If you don’t have three months’ worth of living expenses set aside for emergencies, consider that goal next, while paying at least the minimum on any loans and credit cards.

3. Are you planning for retirement?

Your retirement account earnings may produce earnings of their own, so the earlier you start to save, the more growth potential you have. Plus, some retirement contributions help you minimize taxes.

Save it up!

You can’t borrow for retirement, so consider this goal next. As you build your retirement accounts, you can continue to chip away at debt at the same time.

5. What are your other goals or needs?

If your high-rate debt is under control, you have savings in an emergency fund and are contributing to your retirement, it’s time to consider saving for other things.

Save it up!

Depending on your goals, you can save for: A new car, education or a down payment on a home. Once you have those up and running, you can look toward the fun stuff like vacation and other big purchases.

Pay it down!

If your rates and terms are reasonable, you may decide to stay the course with your monthly payments. Or you could bump up your payments to pay those debts faster – especially any with higher rates. That way you’ll save on total interest paid and have more money to allocate to your goals.

YOUR TURN

Based on your current financial goals; are you Saving Up or Paying Down? We want to hear from you! Sound off on our Facebook Page, our Twitter, Instagram or LinkedIn feeds. And don’t forget to subscribe to our monthly eNewsletter. You may unsubscribe at any time.

 

The material provided on this website is for informational use only and is not intended for financial or investment advice. Patrick Parker Realty assumes no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.

Study: How Much Will Paying Off Credit Cards Improve Score?

Paying off credit cards can improve credit scores substantially as outstanding debt is the second most heavily-weighted factor in calculating scores. Here we examine factors that determine credit scores. If negative marks on your credit report are the cause of your low score, it is advised to find a credit repair service to help remove them.

A survey conducted by the Consumer Federation of America found that a startling number of Americans know little about credit scores, including more than a quarter of respondents not knowing ways to raise or maintain their scores.

There are many ways to improve credit scores and paying off revolving debts is one of them. Credit cards and other outstanding debts is the second most important factor considered when determining your FICO score – the most widely used credit score by lenders. Therefore by reducing the amount you owe your score will increase, but by how much is determined by other factors.

One quick way to raise your score is to hire a credit repair company that can remove negative marks on your credit reports that lower your score.

There’s Not a Fixed Amount of Points Your Score Will Improve

Because each individual’s credit report is unique and there are many factors that determine one’s score other than credit card debt, there’s no set amount of points your score will improve from doing any one action that applies to everyone.

How Much Your Score Improves Depends on Your Outstanding Balance

Someone who pays off $1,000 on a card with a $5,000 limit isn’t going to see the same score hike that someone paying off a maxed out card will. This is because of your credit to debt ratio. The generalized rule is for every open account you have, you want your credit utilization to be below 30 percent.

how-much-your-score-improves-depends-on-your-outstanding-balance

Always keep your credit utilization below 30 percent.

Example: If you have a card with a $1,000 limit, you never want to have more than $300 charged on it.

How Long it Takes You to Pay Your Credit Card Debt Also Matters

The manner in which you pay your credit card debt also contributes to the rate at which your score improves.

For instance, if you stop using the card and continue to pay it down month after month until it is eventually at a $0 balance or at least below 30 percent utilization, your score will very gradually increase by a few points here and there, assuming all of your other credit accounts are in good standing. If you pay the balance in full, you’ll notice a moderate point increase much sooner.

The best way to see what actions can improve a score and by how much is to use a credit analyzer tool. A credit analyzer can tell you how to improve your score based on the amount of cash you have on hand to pay your debts, as well as how much of a point increase to expect per action.

Alas, most credit analyzer tools aren’t free, but Credit Karma has a Credit Score Simulator that uses the information on your TransUnion credit report to estimate the result of changes to an account.

The 4 Other Factors That Determine Your FICO Credit Score

By now you know that paying your credit card debt will improve your credit score, but what else makes up your FICO score?

fico-score

These percentages are used to calculate FICO scores, the credit score used by 90% of lenders.

1. Payment History – 35%
Payment history is the largest factor used in determining your FICO score. This includes on-time payments, so if you’re trying to improve your score, whatever you do, don’t let a payment run late or be missed.

2. Length of Credit History – 15%
What this means is how long your accounts have been opened. Generally, a longer established credit history results in a better score, assuming the accounts are in good standing. FICO looks at the age of your newest account, oldest account, and the average age of all of your accounts combined.

3. Types of Credit – 10%
What types of credit do you have? A mortgage, student loans, credit card debt, medical bills, retail accounts…all of these are considered.

4. New Credit – 10%
You never want to open too many new accounts within a short amount of time. According to myfico.com, “Research shows that opening several credit accounts in a short period of time represents a greater risk – especially for people who don’t have a long credit history.”

The Road to Recovery: How to Boost Your Score

By boosting your score you’ll receive lower interest rates and increase your chances of approval for all types of loans and credit decisions.

Your credit report information is updated frequently, so when you begin making positive changes it won’t take very long to notice improvements if you’re consistent. Other than paying down your credit card debt, there are other actions you can take.

The Consumer Federation of America suggests these four actions for improving your credit score:

  • Consistently pay bills on time every month.
  • Do not max out, or even coming close to maxing out, credit cards or other revolving credit accounts.
  • Pay down debt rather than just moving it around, as well as not opening many new accounts rapidly.
  • Regularly check credit reports to make sure they are error-free.

YOUR TURN

What tips do you have for increasing your credit score? Are you looking to increase your credit score but hitting roadblocks? Sound off on the Patrick Parker Realty Facebook Page, Twitter or LinkedIn feeds and don’t forget to subscribe to Patrick Parker Realty’s monthly Jersey Shore HOME ADVICE™ email newsletter for articles like this delivered straight to your inbox.

4 Credit Secrets for Buying a Home

 

In a report that was done by the Federal Trade Commission in 2015 they found that 1 out of every 4 consumers had errors on their credit report.

That being stated, means that it’s possible that you could possibly fall under that scenario. There are many things you can do to improve your credit on your own and should consider before buying a home. Let’s dive into four ideal credit secrets that will help rebuild your credit and improve your score.

credit-score-home-buying-fico-mortgage


Pay off collections first, inquiries second.

While it’s unattested of people living in South Florida, living on credit at one point or another is the norm. We’re talking about using credit cards for everyday living expenses, like rent or groceries. If you’ve fallen behind these are the first debts to focus on.

According to the folks at Experian, charge card debt is about 50% of most people’s issues when it comes to scarring or less-than-perfect credit.

RELATED: What Lenders Want To See On Your Mortgage Application

By paying any of the items that went to collections first, then focusing on your hard inquiries second you’ll see an improvement in your score almost right away.

By the way, if you check your score once in the morning and then once at night it will most likely be different. The debt fairies are constantly changing and reporting, making it very hard to stay consistent.

The good news is, most of the time they are off by a few digits. Hard inquiries are generally coming from lenders for items like mortgages, car loans and more credit cards.

They can stay on your report for a while, and there are some cases you may have to ask to have them removed.

Be consistent with all 3 of the bureaus
Each score is synonymous to the other two bureaus. Don’t forget to be consistent with all three of the credit bureaus (TransUnion, Experian and Equifax).

Just because you ask for an item to be changed or removed, doesn’t mean that all three get the message.

By pursuing your due diligence, and following up with all three you are ensuring that they are undeviating from one another. Peace of mind will be beneficial by having consistency in place.

RELATED: What Affects Your Credit Score?

Check for errors and discrepancies
You’d be surprised to learn how many people fail to do this. A man who’s a Senior, Junior, the third, etc., needs to make sure his credit is being reported and not a relative. This is a common mistake that does happen.

Of course, everyone wants to believe bureaus are safe from ‘human error’, but this is just not the case. It’s your credit and your responsibility to know what’s on it.

It’s also necessary to stay engaged in being accurate. The last thing you want is to run into an incubus during an important purchase, such as buying a home, so be sure to check this often.

RELATED: 9 Fast Fixes For Your Credit Score

By law, you are entitled to one free credit report a year. Contact a loan officer for more details on how this works.

Follow-up
Working hard to manage your credit is important. Healthy credit makes you have the security necessary knowing you’re covered with issues like emergencies or better yet, a vacation. It’s also vital when getting a mortgage.

The other credit secret that we want you to know is that following up is HUGE when it comes to buying a home. Once you start to pay off your debts, you’ll want to follow up with the creditors.

Your report, needs to be consistent with all three bureaus and if you find errors, keep following up with the appropriate party until they’re gone.

FREE DOWNLOAD: The Ultimate Home Buying Checklist

Are you a “credit master warrior”? Share your stories on the Patrick Parker Realty Facebook Page, Twitter Feed or on LinkedIn. Plus don’t forget to subscribe to the monthly Patrick Parker Realty email newsletter for articles like this one delivered straight to your inbox.


8 New Year’s Resolutions That Will Save You Money
Plus your FREE DOWNLOAD: Budget Building Worksheet

new-jersey-budgetWhen it comes to money, setting New Year’s resolutions for yourself is easy, but committing to and following through with those resolutions is a completely different story. This is why it is important to set realistic and achievable financial goals for yourself. There is hardly a quicker way to shove those New Year’s resolutions aside than to realize that they are unattainable or that you have set the bar so high that only Warren Buffett himself could achieve them. That being said, here are a few ideas for money-saving New Year’s resolutions that are set to reasonable levels and thus promote continued progress throughout the year.

1. Build a budget
Starting off the year with a budget is an easy resolution that can be completed while watching television or soaking in the tub. Your budget doesn’t have to be in a fancy spreadsheet with graphs and charts. A simple, hand-written list of expenses and incomes can get you started, and can be expanded later if needed. The hard part of this resolution is committing yourself to watching, modifying, and adhering to your budget over the course of the year. Consider putting your budget in an easy to see place like your refrigerator or computer desktop so that it will be a constant reminder of your financial goals and your commitment to those goals.

FREE DOWNLOAD: Budget Building Worksheet

2. Make extra mortgage payments
Resolving to make an extra payment or two toward your mortgage can be a great way to start the year. By making an extra payment each year, not only are you reducing the time and amount it will take you to pay off your home, but you will be reducing the amount of interest those greedy banks receive. Since most mortgage interest rates are well below those of credit cards, it is important that you review any other debt with higher interest rates that may need to be dealt with first, before putting extra money toward your mortgage.
3. Find ways to generate side income
Picking up extra income can be a wonderful financial resolution. In a suffering economy, the peace of mind and supplemental income that comes with a second job or side business can be a great buffer against the stresses of economic strife. Even an extra hundred dollars a month can be a great way to reach other financial goals like paying down debt, making an extra mortgage payment or starting an emergency fund.

4. Start a rainy day fund
If you don’t have one already, starting an emergency fund can be a good New Year’s resolution. You never know what tomorrow might hold when it comes to your finances, but with an emergency fund, you can face the unknown with a bit more confidence. While some financial gurus call for you to have $500 in the bank, you may want to stash a bit more than that. $500 won’t get you far these days, especially if you lose your job. Even one or two months of your average income can go fast, so build up a fund you’re comfortable with. Bear in mind that if you have outstanding credit card debt, you might want to deal with that first to eliminate those costly interest payments.

5. Invest in your retirement
It’s never too early to start planning for retirement – and these days it’s hard to count on anyone but yourself to do it. Setting aside money for the future, whether in an IRA, 401k, 403b, or even just a savings or checking account can start you on the path to a financially secure retirement.

RELATED: Ideas to Save for Your Retirement

6. Understand your investments
It is amazing just how many of us hold investments that we know little about. Nothing illustrates our lack of financial education better than the recent mortgage meltdown where many homeowners had no real understanding of the mortgages to which they had committed. Many of us associate understanding our investments and financial situation with knowing what stocks we own or how much we’ve contributed to our 401k. Those are great first steps, but to commit further, we should understand topics such as where that money is invested, how much our credit costs us each year, how our Social Security benefits are calculated, and other similar financial information.

7. Learn to save
Learning to save sounds easy, but it doesn’t happen overnight. Becoming accustomed to money-saving techniques can be a lengthy and involved process, especially for those of us who haven’t had much experience with it. Using coupons, looking for store discounts and sales, tracking our expenses, and utilizing a budget are skills many of us have learned to do without until recently. A fresh year provides the perfect excuse to buckle down and become familiar with the saving process.

RELATED: Quickest Ways to Become Debt Free

8. Become debt-free
And let’s end with a biggie – freeing yourself from debt. Whether this is a realistic and attainable goal is really dependent upon your financial and debt situation. How heavily you are in debt, what type of debt you hold (credit, car loan, mortgage, etc.), your income level, and the interest rates pertaining to your debt can all play into how quickly or how successful you are in becoming debt free.
Your Turn

Whar are your New Year’s Resolutions… and have you kept them? Sound off on our Facebook or Twitter pages and don’t forget to sign up for our monthly Patrick Parker Realty eNewsletter for articles like this 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:
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 Realty Tax Season Blog Series
How Short Sales and Foreclosures Affect Your Taxes

new-jersey-taxesIf you engage in a short sale or your mortgage lender forecloses on your home, there are some important tax implications that you’ll want to consider.

Whenever you sell a home, you need to calculate your capital gains to determine whether you owe any tax. If you engage in a short sale or your mortgage lender forecloses on your home, the Internal Revenue Service treats it just like a sale. Foreclosures and short sales, may also require you to recognize ordinary income if the lender cancels any of your outstanding mortgage balance and you’re ineligible for an exclusion.

Short sales and foreclosures
Both short sales and foreclosures are usually the result of a borrower’s inability to continue making mortgage payments. A short sale is where your mortgage lender allows you to sell the home for less than your outstanding loan balance and cancels your obligation to repay any remaining loan balance.

With a foreclosure, the mortgage lender will take possession of the home if it doesn’t receive scheduled mortgage payments over an extended period of time. Also, in many cases, the lender cancels your outstanding mortgage balance. Sometimes, this debt cancellation is taxable as ordinary income.

Tax on foreclosures
When your foreclosure includes a cancellation of debt, you only have an obligation to report it as ordinary income if you were personally liable for the entire mortgage, despite the security interest your lender takes in the home. This amount will be reported in Box 2 of a 1099-C that the lender will send you.

You also need to calculate the capital gain that results from the foreclosure. To calculate the gain, subtract your tax basis in the home — generally the purchase price plus the cost of home improvements you make — from the home’s fair market value. However, if you’re not personally liable for debt that remains, use the outstanding mortgage balance at the time of foreclosure instead of the home’s fair market value.

Gain on short sales
Similar to a foreclosure, any debt that your mortgage lender cancels because of a short sale is taxable only if the terms of your mortgage hold you personally liable for the full amount of the loan. Regardless of the tax consequences, your lender will report the debt cancellation on a 1099-C form.

For example, if you owe $500,000 to your mortgage lender and short sale the home for $450,000, your lender will report $50,000 of canceled debt on your 1099-C. Since most mortgage lenders wouldn’t agree to a short sale if the value of the home exceeds the outstanding mortgage balance, no capital gains issues exist.

Possible exclusions
Through the end of 2014 you may be eligible to exclude canceled debt from your tax return if it relates to qualified principal residence indebtedness and meets the requirements of he Mortgage Forgiveness Debt Relief Act. Mortgages include those you obtain to buy, build or substantially improve a home and for which the lender retains an interest in the home until it’s paid off. You may also be able to exclude the capital gains as well. If you lived in the home and were the owner for a total of two years during the most recent five-year period, you can exclude up to $250,000 of the capital gains or up to $500,000, if filing jointly, in some cases.

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.

_____________________________________________________________________

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

Check back in with the Patrick Parker Realty Blog each Tuesday, Thursday and Saturday for more Tax Season Blog Series’ Posts and sign up for the monthly Patrick Parker Realty eNewsletter to have updates delivered to your inbox.

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 >
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 Exemptions and Deductions for Families

new-jersey-taxesAs a family, you may be able to save more on your taxes than a single person can. Once you discover all the deductions that are available to you, you’ll be able to save more money this year, and plan better for your family’s future.

If you want to make sure you’re taking advantage of every deduction that you’re entitled to, this article is for you. We’ll explain which deductions are available to your family, and also point out some deductions that many families overlook each year.

Tax exemptions for you and your dependents
An exemption is an amount of money you can subtract from your Adjusted Gross Income, just for having dependents. Personal and dependent exemptions for yourself and qualifying family members reduce the amount of income on which you will be taxed. (in effect, these exemptions are the same as deductions).

In 2014, you can claim a $3,950 exemption for each qualifying child, which may include your child or stepchild, foster child, sibling or step-sibling, or descendants of any of these, such as your grandchild. To qualify for the exemption, the child must live with you more than half of the year and be under 19 at the end of the year, or under 24 and a full-time student for the year (defined as attending school for at least part of five calendar months during the year).

You no longer have to show that you provide more than half of the child’s support, as was required under the rules in effect a few years ago. However, to claim an exemption the child cannot provide more than half of his or her own support.

There is no gross income test for a qualifying child. That means you can claim an exemption even if the child has a fair amount of income, as long as the child doesn’t provide over half of his or her own support, as outlined above.

You and your spouse are also each entitled to a $3,950 personal exemption in 2014.

Example of personal and dependent exemptions
For a married couple with three children, the total exemption deduction for 2014 is $19,750 ($3,950 x 5). If the marginal income tax rate for this family is 25 percent, the five exemptions save $4,875 in taxes.

Other relatives
Many families provide homes for relatives such as parents or grandparents, or support relatives who do not necessarily live with them. If you’re in this situation, you can claim a dependent exemption for a qualifying relative who is not a qualifying child, as long as the supported person meets all five of these criteria:

1. The person is either a relative or a full-time member of your household.
2. He or she is a citizen or resident of the U.S. or a resident of Canada or Mexico.
3. He or she did not file a joint income tax return with anyone else.
4. You provided over half of his or her support.
5. The person in question has less than $3,950 of gross income in 2014.

If your child is not a qualifying child because he or she does not meet the age/student test or the residence test, you may still be able to claim an exemption for the child as your qualifying relative, but only if he or she has gross income under $3,950 for 2014, and you provide more than half of his or her support.

Who’s a relative?
A person who has lived with you for the entire year as a member of your household can meet the definition of a qualifying relative even if he or she is not actually related to you by blood or marriage. But if the person did not live with you for the entire year as a member of your household, the nature of the relationship becomes important.

Here’s a list of people considered to be relatives by virtue of blood or marriage:

  • Children, grandchildren or stepchildren
  • Siblings, including half or step-siblings
  • Parents, grandparents or any other direct ancestors
  • Stepparents
  • Aunts or uncles
  • Nieces or nephews
  • Fathers-in-law, mothers-in-law, sons-in-law, daughters-in-law, brothers-in-law or sisters-in-law

There are special rules for persons receiving support from two or more individuals and for children of divorced or separated parents. If you are in this situation, read IRS Publication 504: Divorced or Separated Individuals.

Only one exemption per person
The same person cannot be claimed as a dependent by more than one taxpayer, nor can a child who can be claimed as a dependent on his or her parents’ return claim a personal exemption on his or her own return.

To claim anyone as a dependent, you must enter his or her Social Security number, or the equivalent, on your tax return. Using that number, the IRS software can tell fairly easily if two returns claim the same dependent, so make sure that you’re entitled to the deduction before you prepare your return.

More information on exemptions
For more information, see IRS Publication 501: Exemptions, Standard Deduction and Filing Information.

Medical expenses
You can deduct any expense you pay for the prevention, diagnosis or medical treatment of physical or mental illness, and any amounts you pay to treat or modify any part or function of the body for health—but not for cosmetic purposes. (So you can deduct the cost of LASIK eye surgery to correct your vision, but not the BOTOX® Cosmetic injections to smooth the wrinkles around your eyes.) You can also deduct the cost of transportation to the locations where you can receive this kind of medical care, your health insurance premiums, and your costs for prescription drugs and insulin.

Medical expenses are only deductible if you itemize, and only if they exceed 10 percent of your Adjusted Gross Income. You can only deduct the medical and dental expenses that exceed those percentages.

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.

Beginning Jan. 1, 2017, all taxpayers may deduct only the amount of the total un reimbursed allowable medical care expenses for the year that exceeds 10% of your adjusted gross income.

Example: Emma’s Adjusted Gross Income was $100,000, and she spent $8,000 on medical expenses. She and her spouse were both under age 65 in 2014. Because her expenses did not exceed 10 percent of her AGI, she cannot take the deduction for the amount above $7,500. Her deduction is $0.

Qualified long-term care expenses are treated as medical expenses subject to the 10 percent of AGI floor. Medical expenses also include the premiums you pay for qualified long-term care insurance. However, the amount of premium you can deduct is limited based on your age. For 2014, deductible premium amounts range from $360 to $4,550, depending on the covered person’s age at year end.

There is an exception for qualifying health insurance premiums paid by eligible self-employed individuals. Such costs can be deducted as adjustments to income which means eligible taxpayers can deduct 100 percent of their qualifying health insurance premiums on page 1 of Form 1040. (In other words, this write-off is available whether you itemize or not.)

Deducting medical expenses for someone else
You can deduct medical costs you pay directly to medical service providers for another person according to the following rules:

If you pay medical expenses for someone you do not claim as a dependent on your income tax return, you can deduct those expenses if:

  • He or she either lived with you for the entire year as a member of your household.
  • He or she is related to you (as described in the section Who’s a Relative).
  • He or she was a U.S. citizen or legal resident, or was a resident of Canada or Mexico, for some part of the year.
  • You provided over half of his or her support for the year.

Note that these rules are slightly less stringent than those for the dependency exemption.

Example: it’s possible that you can deduct medical expenses you paid for a parent in 2014, even though you can’t claim the parent as a dependent because his or her gross income exceeded $3,950.

  • If you paid a person’s medical bill this year for an expense incurred last year, and that person was your dependent last year, you can deduct the expenses on this year’s return even if he or she isn’t your dependent this year. The key factor is that the person was your dependent when the medical services were provided.
  • If you’re divorced and pay medical expenses for your child, but don’t claim him or her as a dependent because you are the non-custodial parent, you can still deduct those expenses. This assumes that you would qualify to take a dependency exemption for your child is you were the custodial parent.
  • You can deduct medical expenses that you pay for your spouse. What most people don’t know is that you can claim medical expenses for your spouse’s medical treatments that occurred before you were married if you paid those bills after your marriage. The rule is that you must be married either at the time of the medical treatments, or at the time the bills are paid.

For a complete list of qualified medical expenses, see IRS Publication 502: Medical and Dental Expenses.

Education expenses
In most cases, you can’t deduct the full amount of your child’s educational expenses because they are considered to be personal expenses. However, the following credits may help ease your tax burden:

  • Deduction for college tuition expenses:
    This deduction is available to you regardless of whether you itemize your deductions. The maximum deduction is $4,000. The maximum deduction drops to $2,000 and then disappears completely as income rises. Expenses eligible for the deduction are higher education tuition and mandatory enrollment fees. These same expenses are also eligible for the American Opportunity tax credit but you can’t take both in the same year.
  • American Opportunity and Lifetime Learning Credits:
    Available only for 2009 – 2017, the American Opportunity Credit is a tax credit of up to $2,500 for all four years of a college education. Single taxpayers with modified adjusted gross income (MAGI) of $80,000 or less and married taxpayers with MAGI of $160,000 or less are eligible. If the American Opportunity credit is not available, the Lifetime Learning credit might be allowed. It applies to tuition and mandatory enrollment fees for just about any post-secondary course. It is 20 percent of the first $10,000 of eligible expenses to a maximum of $2,000. MAGI limits are $60,000 for single taxpayers and $120,000 for married taxpayers filing jointly. For more information on higher education tax breaks, see IRS Publication 970: Tax Benefits for Education.
  • Education Savings Accounts:
    Education Savings Accounts (ESAs) allow up to $2,000 each year to be contributed for each child under age 18. You can save a fairly sizable amount over several years. ESA contributions aren’t tax-deductible, but you can withdraw your investment and earnings tax-free as long as you use the funds to pay for college costs. If your child chooses not to attend college, you can transfer the balance to another member of the family. You can use the money from an ESA to pay for elementary and high school education, as well as for college educational costs. The ability to make ESA contributions is phased out for higher-income taxpayers.
  • Student loan interest:
    Interest on loans you take out to pay for college or vocational school expenses can also be deductible. The student loan interest deduction limit is $2,500 for qualified student loans, but the deduction is phased out for higher-income taxpayers. For 2014, the phase out begins at $120,000 on joint returns and at $60,000 for unmarried individuals.

Other ideas to consider

  • If you are the sole proprietor of your own business, consider employing your child (under the age of 18) for certain tasks. You can pay your child up to $6,200 in wages (the maximum standard deduction for the single person in 2014) without incurring income taxes and most employment taxes. The wages would be tax-free to your young employee and you could deduct the wages as a business expense on your own tax return.
  • If you have a child going to college in another area, consider purchasing a house or a condominium for your child to live in. By treating the house or condo as a second home, you can deduct the mortgage interest and real estate taxes on your own 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.

____________________________________________________________________________________


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

Check back in with the Patrick Parker Realty Blog each Tuesday, Thursday and Saturday for more Tax Season Blog Series’ Posts and sign up for the monthly Patrick Parker Realty eNewsletter to have updates delivered to your inbox.

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 >
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
5 Ways Buying Your First Home Affects Your Taxes

new-jersey-taxesIf you’re a first-time home buyer, plenty of things are working in your favor. Mortgage rates are still hovering near all-time lows, and despite home prices beginning to rise, they’re still low relative to pre-recession averages. Whether you buy your first home in a bear or a bull market, however, you’re always going to contend with tax implications. As long as you’re aware of relevant regulations and benefits, buying your first home should be the rewarding experience you’ve always dreamed it would be.

1. Home Mortgage Interest Tax Deduction
The most valuable tax deduction for a first-time home buyer is the mortgage interest tax deduction. Your tax return may take more time to complete than in past years since you’re going to have to itemize your deductions in order to take advantage of it, but doing so is in your best interest as it can result in a significant deduction. Be on the lookout for Form 1098 from your lender at year-end, which details how much mortgage interest you’ve paid.

2. Points Are Tax Deductible
When you pay “points” on a mortgage you’re paying extra money to your lender upon execution of the loan in order to lower your interest rate. Each point equals 1% of the purchase price of the home. This amount is tax deductible, however, the rules surrounding how and when you can deduct points paid are complex. In some cases, you cannot deduct the full amount in the year you pay it – you may have to deduct it over the life of your mortgage. For additional information, seeIRS Publication 936.

3. You Can Deduct Property Taxes
As a homeowner, you are required to pay property taxes. These are typically due once per year, although you may be able to pay them in two installments. Depending on property tax rates in your area, these can be significant expenditures. You can ameliorate the effect of property taxes on your finances by setting up a mortgage escrow account and paying your taxes in monthly increments. This is going to increase your monthly payment, but it protects you from having to write out a big check twice per year.

4. Private Mortgage Insurance is Usually Tax Deductible
If your down payment is less than 20% of the purchase price of your new home, you are often required to pay premiums for private mortgage insurance, which your lender takes out to protect against your potential default. In many cases, this payment is tax-deductible as well. The annual amount may be also included on your 1098 Form from your lender. Just be sure to cancel this insurance as soon as your level of home equity reaches 20%, if possible. Again, you can referenceIRS Publication 936 for all details.

5. Advantages of Getting Cash Back from the Seller
When purchasing your first home, you have the ability to request cash back from the seller, known as seller concessions. If you agree in advance, you can pay a higher sale price for the home, if the seller returns that money to you to use toward closing costs or home repairs.

There are limitations as to what you can use these funds for, usually determined by the lender or type of loan you’re applying for. Consult with a mortgage professional to find out which limitations apply to you. Although this plan results in a higher monthly payment, you can reduce your out-of-pocket expenses when purchasing the home, as well as boost your mortgage interest deduction.

And one more thing…
As a first-time home buyer, the first few years of your mortgage interest tax deduction are going to be significant. Make sure you use these funds effectively. The last thing you want is to blow your windfall on unneeded purchases. Instead, consider longer-term goals such as creating or building an emergency fund (which can come in handy in the event you need home repairs), setting these funds aside for retirement or your child’s college education.

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.
____________________________________________________________________________________

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

Check back in with the Patrick Parker Realty Blog each Tuesday, Thursday and Saturday for more Tax Season Blog Series’ Posts and 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.


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