Questions for the Tax Lady: December 20th, 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, and I will do my best to get an answer for you!

Question: I bought a home in 2008 and took advantage of a $7,500 incentive. I recently got a letter saying the money was a 0% interest loan from the government and that I must pay back $500 per year. I can barely pay my bills and have to get food from the good bank. Is there any way to get this lowered or removed?

Answer: You are in good company. Many people who received the First-time Homebuyer Credit in 2008 did not realize they were going to have to pay back the credit. Unfortunately, there really isn’t a work around. Since the IRS considered this an interest-free loan, they will come collecting.

Your best bet is to increase your income tax withholding by $42 a month. I know times are tough, but trust me, $42 a month is a lot less than the interest and penalties that would result from failure to pay back the credit.


Question: Since Obama signed the tax cut deal, does that mean my tax rate is going down next year?

Answer: Isn’t that the question of the week? Everyone is desperately trying to figure out what the tax deal means for them. Here’s the basic breakdown:

The short answer is no, your tax rate will not change. This means your official marginal tax rate will be the same that it was last year. That being said, there are other changes to the tax laws that might affect your overall tax liabilities. The most obvious example is the payroll tax deduction.

The Making Work Pay Tax Credit is gone, however, the tax deal reduced Social Security tax withholding by about 2%, so you might get a better tax break in the long run. If you earn $40,000, you’ll end up saving $800 in payroll taxes.

Questions for the Tax Lady: September 13th, 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, and I will do my best to get an answer for you!

Question #1: Is the IRS right when they say we have to pay them back the first time home buyers credit of $7,500 we received two years ago when my husband and I got the house, I am the borrower and he is the cosigner, but he has been a cosigner on another home before this one as well.

There have been a few different versions of the Home Buyer Tax Credit over the last few years. From the question, it sounds like you received the original 2008 tax credit, worth a maximum of $7,500.

Unfortunately for the taxpayers who took advantage during the first wave of the credit, the IRS is expecting a payback. While the government called it a credit, in reality the original version was little more than an interest-free loan. Starting with the 2010 tax filing season, those repayments are coming up due. That means your tax bill will be about $500 higher than you were expecting.

Anyone who claimed any of the home buyer credits in the last few years should consult a qualified tax professional to make sure you have met all your federal tax obligations. The rules are tricky, and the IRS will be looking closely at every taxpayer who took advantage of this tax break.

Question #2: I filed an automatic extension with the IRS (Form 4868) when do I need to get my return filed by?

Every taxpayer is automatically entitled to a six-month extension when filing their taxes. So, your tax return is now due on October 15.

Remember, if you have additional taxes from 2009 due, those were still supposed to be paid by April 15. If your tax return shows a balance due, you may have some late payment penalties and interest tacked on to your bill. It may not be much, but let this be a reminder to plan ahead next tax season!