Questions for the Tax Lady: September 27th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply. I will do my best to get an answer for you!

Question #1: Taxes are not our only debt, we lost our home, cars and have several medical bills, and collections along with tax levies coming all the time. Are taxes dischargeable in bankruptcy, we have to file chapter 7 anyway, and our attorney thinks he get our largest tax debt included since it is over 4 years old now.

Answer: I’m so sorry to hear of your difficulties. While not for everyone, bankruptcy can be a lifesaver for those drowning in debts.

To answer your question, some tax debts can be discharged through a Chapter 7 bankruptcy filing. There are five criteria for determining if the federal income tax debt is dischargeable:

1. The due date for filing the tax return associated with the tax debt is at least three years ago.
2. The tax return was filed at least two years ago.
3. The tax assessment is at least 240 days old. (This is one that trips people up. Make sure you know when the IRS officially assessed the debt.)
4. The tax return was not fraudulent.
5. The taxpayer is not guilty of tax evasion.

If your bankruptcy attorney is advising you to include your tax debts in the bankruptcy filing, and you are confident you meet the above criteria, then I would trust your attorney. If you are not sure your tax debt meets these requirements, you may request your tax transcripts from the IRS to verify the dates of the debt assessment, the due date of the returns and more.

Question #2: If you missed filing a tax return for two years, can you still get a payment plan from the IRS?

Answer: The IRS offers payment plans called Installment Agreements for people who are unable to pay their entire tax bill at once. However, there are some sticking points:

1. The IRS will not enter into an Installment Agreement with you until you are 100% compliant in your tax filings. Before you apply for an Installment Agreement, find a qualified tax professional to help you prepare and file the missing tax returns.

2. The IRS bases the amount of your monthly payment on your ability to pay, so be prepared for a much higher payment amount than you might hope for. The IRS has very specific guidelines for determining how much you should be paying them each month, and many taxpayers suffer from a little sticker shock when they see how much the IRS expects.

Once you’ve filed the missing returns, and have your financial information handy, fill out Form 9465 Installment Agreement Request, or visit www.irs.gov and click on I Need To… Set Up a Payment Plan from their menu options.

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IRS Removes Debt Indicator for 2011 Tax Filing Season

In their newest press release, the IRS announced that starting this January they will no longer provide tax preparers with a “debt indicator,” which had been used to facilitate refund anticipation loans (RALs).

“As we prepare for tax season every year, we look at past practices and consider whether they still make sense. We no longer see a need for the debt indicator in a world where we can process a tax return and deliver a refund in 10 days,” IRS Commissioner Doug Shulman said. “We encourage taxpayers to use e-file with direct deposit so they can get their refunds in just a few days.”

So far this year, more than 95 million tax returns have been e-filed, representing more than 70 percent of tax returns.

“Refund Anticipation Loans are often targeted at lower-income taxpayers,” Shulman said. “With e-file and direct deposit, these taxpayers now have other ways to quickly access their cash.”

The IRS has been reviewing refund settlement products, such as RALs and Refund Anticipation Checks (RACs), as part of the Return Preparer Review released in January. Specifically, the IRS announced that it would study refund settlement products.

RALs are loans secured by a taxpayer’s anticipated tax refund. Currently, tax preparers who electronically submit a client’s tax return receive in the acknowledgment file an indication of whether an individual taxpayer will have any portion of the refund offset for delinquent tax or other debts, such as unpaid child support or delinquent federally funded student loans. This acknowledgment is known as the debt indicator, and is used as an underwriting tool for RALs.

How To Be Debt-Free In 2011

From Forbes.com:

It's hard to think of Christmas when you're busy cooling off by the nearest air-conditioning vent, but now is the best time to prepare. Remember that credit card bill you cringed over in January? If you start saving now and plan for your holiday spending, you'll be able to shop guilt-free with cash, and ring in the New Year knowing you won't be paying for those gifts until spring. Here's a plan to get you there.

Set a Goal

How much does the holiday season set you back? It is estimated that the average American spends between $700 and $800 on gifts. Start by making a list of all the people you expect to buy for, and assign a rough budget for each. Don't forget to budget for travel expenses you might incur, or food and decoration for that dinner party you plan to host for your family. Be realistic about all the added cost of the holiday season, so you have an honest savings goal to work with.

Ready, Set ... Save!

Now that you have a goal, divide this dollar amount over the months leading up to Christmas. Let's say your goal is $750; divided by five months that means $150 a month, depending on how long you have left until Dec. 25. This will be your monthly savings plan. If you can save up this sum, you will be able to pay cash for everything come shopping time.

Why cash? Remember that January credit card bill? You're not alone: studies show we spend more when pulling out the plastic instead of cold hard cash. Paying cash will make sure you don't spend more than planned, and save you the credit card interest charges.

Make Your List and Check It Twice

So what if there is just no way you can make this savings goal? Maybe you or your partner lost a job this year, or maybe you have other bills that take priority over Christmas gifts. Prioritize your list, and look for ways to cut the budget. Instead of buying your colleagues and friends presents, maybe you can make a batch of sweets, or host a dinner--better yet, make it a potluck. Sure, grandma loved that food basket you ordered online, but she'll love a framed photo and artwork from the kids too.

Household Net Worth Up $1.1 Trillion In First Quarter

According to the Federal Reserve (via MSNMoney.com) the total household net worth in the country rose by $1.1 trillion in the first quarter of 2010. It increased to $54.6 trillion, which is still below the $64.4 trillion high in 2007, when the recession began.

Financial assets -- primarily stocks and mutual funds -- accounted for virtually all of the wealth increase, but the stock market has weakened in recent weeks, so those gains may be at least partially reversed in the second quarter.

The Standard & Poor's 500 index is down 8 percent since the end of the first quarter.

Americans pared debt at a 2.4 percent pace in the first quarter, the seventh consecutive quarter of declines in household borrowing. Mortgage debt dropped at a 3.8 percent rate, the biggest decline in records dating back to 1952.

Gold Prices Hit New Record

From CNN Money.com:

Gold prices climbed to a new record Tuesday as Europe's debt troubles sparked demand for perceived safe havens, such as the precious metal, and investors hedged against inflation.

What prices are doing: Gold for August delivery rose $3.60 to $1,244.40 an ounce. It climbed as high as $1,254.50 an ounce earlier in the day, a record for intraday trading.

What's moving the market: Investors remained wary about the global economic recovery amid Europe's ongoing sovereign debt problems and looked to gold and other low-risk investments, which are attractive during times of economic crisis and uncertainty.

The metal's price has jumped 13% this year.

Gold prices also got a boost from investors who believe Europe's fiscal problems will subside and are instead worried about rising prices. The Federal Reserve's loose monetary policy has some traders worried about inflation.

What analysts are saying: "One one hand you have the possibility of additional problems in Europe going forward. And if Europe implodes, gold prices will continue to rise sharply higher," said Tom Pawlicki, precious metals analyst at MF Global.

"But if the European problems go away, gold will still trade higher based on the inflation outlook," he added. "Gold is the perfect hedge against inflation.

When the dollar loses its value, gold has been seen as the alternate currency since it holds its value."

Dow Plunge is Wake-Up Call to Deal With Debt

From CNNMoney.com:

Technical glitch. Violence in Greece. Historic U.K. elections. A combination of these factors sent the Dow plummeting nearly 1,000 points Thursday before regaining two-thirds of the ground lost.

But here's the thing: the market could be in for a very bumpy ride in the coming months -- except it won't have technical glitches to blame. U.S. debts, more likely than not, could be an underlying culprit.

In any case, Thursday's Dow drama should be a wake-up call that policymakers heed, said Allen Sinai, chief economist and president of Decision Economics.

The story now is Greece's debt crisis, and the fear of debt contagion to Portugal, Italy, Ireland, Spain -- and EU's neighbor, the United Kingdom.

All of that may spell trouble for U.S. exports six to 18 months from now, Sinai said.

Is Your Spouse Overspending?

Managing your own finances can be hard enough, without having to worry about whether your spouse or partner is overspending. Liz Pulliam Weston of MSN Money.com put together a helpful article with advice on what to do if you are married to a “financial basket case”. You can find a segment of her article below.

Can this financial marriage be saved?

Few couples are on exactly the same page when it comes to money, as I wrote in "9 ways to rein in a spendthrift spouse." Smoothing out the conflicts takes work but usually can be done with communication, compassion and commitment.

Some partners are so far over the edge, however, that their destructive habits can sabotage the family finances.

How can you tell whether your partner just needs a little persuading or is a total financial basket case? You're facing an uphill battle if:

There's an underlying addiction. If your partner has problems with alcohol, drugs or gambling, he or she literally can't think straight. Financial progress takes a back seat to feeding the addiction. Recovery is always possible, of course, but you'd be smart to get counseling (even if your partner won't go) and attend a support group such as Al-Anon, Nar-Anon or Gam-Anon.

There's a mental disorder. Overspending can be a symptom of a number of mental illnesses, including depression, bipolar disorder and attention-deficit disorder, as I wrote in "How the brain busts the budget." Again, progress is possible, but the underlying disorder must first be properly diagnosed and treated.

There's no acknowledgment of the problem. This may be the hardest nut to crack. Your partner either doesn't see what you're worried about or blames the problem on you. Counseling and sessions with a financial planner may help, but if your partner takes no responsibility and instead blames others, prospects for improvement may be dim.

Continue reading at MSN Money.com…

21 Best Money Tips Ever

Earlier today a colleague sent me a link to this story with 21 money and finance tips from different financial experts from around the country. As I always say, sound financial advice is always worth listening to, so I have listed a few of my favorite tips below for all of my readers to consider. Be sure to check out the full list of 21 tips at MSN Money.com.

3. Teach independence

Joline Godfrey

CEO of Independent Means, which teaches financial literacy to families and children

Raise your children to make a job, not just take a job. If they don't know how to create a plan, they'll always be beholden to someone else.

4. Retire your debt before you retire

Jane Bryant Quinn

The dean of personal-finance columnists and author of "Making the Most of Your Money Now"

Best advice I can give: Many people are now going into retirement with debt. So how about this for an old-fashioned idea? Pay off your mortgage before you retire if you want financial safety and security. There is bankruptcy among people in their seventies and eighties who had a lot of debt that they couldn't carry when the paychecks stopped.

Best advice I ever got: In the mid-1970s I met Vanguard founder Jack Bogle, who was calling up reporters to get them to write about an index fund. I had lunch with him, and he showed me studies and materials, and I said, "This can't be true -- actively managed mutual funds have always dominated."

But I took his stuff with me and called him a few times about it, and suddenly a light went off. And of course since then an S&P 500 index fund, over time, has done better than managed funds.

U.S., U.K. Move Closer to Losing Rating, Moody’s Says

From Bloomberg.com:

The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.

The governments of the two economies must balance bringing down their debt burdens without damaging growth by removing fiscal stimulus too quickly, Pierre Cailleteau, managing director of sovereign risk at Moody’s in London, said in a telephone interview.

Under the ratings company’s so-called baseline scenario, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report.

“We expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilizing,” Cailleteau said. “This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics.”

The pound fell against the dollar and the euro for the first time in three days, depreciating 0.8 percent to $1.5090, while the dollar index snapped a four-day drop, adding 0.3 percent to 90.075.

The U.S. government will spend about 7 percent of its revenue servicing debt in 2010 and almost 11 percent in 2013, according to the baseline scenario of moderate economic recovery, fiscal adjustments in line with government plans and a gradual increase in interest rates, Moody’s said.

Bye-bye, Saturday Mail?

Businesses large and small have been struggling through the recession, and the U.S. Postal Service is also feeling the strain of the poor economy. The government agency recently admitted to a $3.8 billion loss last year, and in an attempt to keep their doors open, the post office is hoping to put an end to Saturday mail deliveries.

As this article on CNN explains, the USPS posted a $3.8 billion loss in its 2009 fiscal year, the latest in a multiyear string of whopping losses. Mail volume was down 12.7% for the year, a trend the agency expects to continue over the next decade as more consumers opt for online bill payments and message delivery.

The Post Office was $10 billion in debt as of Sept. 30 -- not far off from its $15 billion debt limit, which the agency expects to hit in its 2011 fiscal year.

The challenges hurting USPS's bottom line are reflective of a "macro change in society," Postmaster General Jack Potter said at a press conference Monday previewing the proposed changes. "All posts around the world are challenged, just as we are, by the diversion of hard copy to electronic medium."

Continue reading at CNN.com…

Debt: The Big Hangover Has Only Just Begun

From BusinessWeek.com:

More than $1 trillion of high-yield debt will come due between now and 2015—a big potential weight on the U.S. economic recovery

Whatever the economic indicator—from manufacturing reports to home sales to consumer spending—the message is clear: The U.S. recovery is under way. It will likely be a tepid comeback, but it will still fit economists' definition of a recovery. While most post-World War II recessions have been followed by strong recoveries, economists and business leaders all caution that this time it will be different.

The Great Recession had many causes. Clearly the bursting of the bubble in asset values, particularly U.S. residential real estate, was the main cause of the subprime mortgage crisis and the resultant bust. Those asset valuations did not shoot higher on their own; they were sustained by ever-increasing debt levels that primed the pump and inflated the bubble.

While asset values can evaporate in an instant, the indebtedness assumed to acquire the asset does not. Significant debt can take years and even decades to eradicate. Unless, of course, the debtor goes bankrupt. While filing for Chapter 11 may appear to be a quick solution, it is by no means an easy one. Few debtors are willing to write off their equity unless there is no other alternative.

Whatever the ultimate resolution, the struggle to pay off, refinance, or renegotiate significant debt can be difficult and is always fertile ground for unintended consequences. The challenges for this recovery and indeed for efforts to increase economic growth in the decade ahead will ultimately be whether those consequences are manageable.

President Orders Debt Panel, Names Chairmen

President Barack Obama issued an executive order this morning to formally create his debt panel. The goal is to help get our country’s debt under control, and Obama has even appointed a new chairman for the commission. The 18-member panel is expected to deliver a report to the Presidents desk December 1^st, with well thought out recommendations for lowering the deficit.

Raising taxes, cutting spending and reforming Medicare and Social Security are all fair game, and thought to be impossible without the backing of both Republicans and Democrats.

"Everything's on the table. That's how this thing is going to work," the President said immediately after signing the order.

The commission must deliver a report to the President by Dec. 1 that makes recommendations for bringing annual deficits to no more than 3% of the size of the economy, as measured by gross domestic product, or GDP. Currently annual deficits for the next decade are on track to be well above that level.

The commission will also be expected to suggest ways to permanently lower the country's total debt - currently expected to hit 77% of GDP in 2020, according to the White House Budget Office.

Continue reading at CNN.com…

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Congress Settles for $300B Increase in Debt Ceiling Until Next Year

From the Examiner.com:

House Democrats settle for a $300 Billion increase in the national debt ceiling in order to avoid limits on spending.

Moderate Democrats had intended to attach amendments to the initial $1.8 Trillion increase that would have required congress to pay for any new legislation by either cutting spending in other areas, or raising taxes. In order to avoid what seemed like a responsible reaction to out of control spending Democratic leaders changed the debt hike to $300B for the next two months, and intend to debate for the rest of the increase next year when congress returns to session.

In an uncharacteristic move Democratic leaders have also said they would not attach the debt hike to the defense spending bill, as it was initially thought. It is doubtful that this is a trend, but for a change congress seems to be letting a bill stand or die on its own merits.

Does Creating Jobs Mean Creating More Debt?

From NPR.org:

Despite all the attention given to Afghanistan this week, President Obama knows that most Americans' biggest concern is the lackluster economy. When new unemployment numbers come out on Friday, they're likely to show that tens of thousands of people lost jobs in November. So the White House is hosting a jobs summit Thursday to collect ideas about how to put people back to work.

The administration will get advice from big-business executives, small-business owners, economists, union leaders and the mayor of Allentown, Pa. Obama also plans to visit Allentown on Friday to kick off a "White House to Main Street" tour.

"We have some people who are really hurting," says Allentown's Mayor Ed Pawlowski. "We're going to talk about things they could do to help stimulate jobs and improve the economy, as far as loosening up lending, getting some credit into the marketplace."

Limited Resources

The administration has been trying to boost credit for small business with limited success. But the president has been hesitant about spending a lot more money to create jobs. He's caught in a political tug of war between those worried about rising unemployment and a rising federal deficit.

"There's one group that says we need to do more about the economy, more to create jobs," says political analyst Charlie Cook. "And then there's the other side that's saying we're blowing the heck out of the budget deficits. And so they're getting squeezed."

Can the Postal Service be Saved?

Over the weekend, the United States Postal Service announced that it had lost $3.8 billion over the past fiscal year, which ended on September 30^th. Their report claimed that they also delivered about 26 billion less pieces through the mail then they had the prior year, which translates to a nearly 13% drop.

The Postal Service, as it is quick to point out, is legally prohibited from taking tax dollars. But in order to stay afloat, the agency has been actively borrowing from the U.S. Treasury: At last count, according to Postal Service spokeswoman Yvonne Yoerger, it owes the government $10.2 billion.

Federal law dictates that the Postal Service can borrow up to $3 billion per year - but the debt cannot grow beyond $15 billion. That means that while the agency, which had revenues of $68.1 billion last year, could potentially borrow another $3 billion in 2010, it will soon no longer be able to legally borrow billions from the government.

Meanwhile, the Postal Service is estimating that without significant changes, it will lose another $7.8 billion in the coming year - and deliver another 11 billion fewer pieces of mail.

Which raises the question: Could the Postal Service be doomed?

"I don't think the Postal Service is in danger of going away totally," said Yoerger, the Postal Service spokeswoman. "But our current business model needs to be reviewed and revised to come up with a sustainable model so that we can get back to profitability while still continuing to meet our mission of serving all of the country with affordable, universal Postal Service."

Continued at CBS News…

1 in 4 Mortgages 'Underwater'

From CNNMoney.com:

In a sign that more foreclosures could be on the horizon, 23% of people with mortgages owe more than their home is worth, according to a report released Tuesday.

Almost 10.7 million U.S. mortgages were "underwater" as of September, said research firm First American CoreLogic.

Another 2.3 million homeowners are within 5% of negative territory, the report said. The two figures combined comprise almost 28% of all residential properties with mortgages.

Negative equity, also called an "underwater" or "upside down" mortgage, has become more common as home values plummet. The report is closely watched because borrowers who are underwater are more likely to be foreclosed.

Would you walk away from your house?

Foreclosures have been rampant for some time, but lately the tide of decay had seemed to be slowing -- so Tuesday's report could dent optimism for the housing market over the next few months.

On Tackling Debt: Some Say 'Just Do It’

There is certainly no easy fix to the government’s massive debt. However, some Senators are saying that Congress is not making any progress in fixing the problem, and that “business as usual” is not working. Senator Evan Bayh (D-Indiana) has proposed that a special commission be created to force Congress to fix the budget deficit.

"Congress is not willing to take short-term pain for long-term pain," Sen. George Voinovich (R-Ohio) told a Senate Budget Committee hearing Tuesday.

"Pain" in this context is defined as Congress enacting spending cuts and tax increases across the board to rein in the nation's massive debt load.

And the country's long-term debt load is massive: The interest on it alone could total $4.8 trillion between 2010 and 2019.

The proposed solution: "Institutional insurrection," as Sen. Bayh put it. "Business as usual in Washington is not going to solve the problem."

Specifically, Bayh and others are proposing the creation of a bipartisan commission that would come up with ways to cut the deficit and then propose legislation on which lawmakers would vote "yes" or "no." Period.

Continue reading at CNN.com…