Newest changes on credit card fees and interest rates

Earlier in 2010, the federal government passed laws that changed how consumers get treated when it comes to credit card fees and interest charges. The changes have come in phases, with the latest changes starting on August 22, 2010.

Penalty fees
The new law limits late payments or over-the-limit purchases. You can't be charged more than your payment or the amount over the limit. For example, if you had a $10 minimum payment, your penalty fee can't be more than $10. The typical maximum penalty fee is $25. If a customer goes over the limit again within six months, the maximum penalty goes to $35. When it comes to going over your limit, the penalty will be no more than the amount you went over. For example, if you spent $15 more than your max. The charge for that cannot be more than $15.

Credit card rate increases
If your credit card company raises your interest rate, you will have to be told why. Your card issuer also has to review the rate increase every six months, and if you deserve it, the rate has to be lowered. Any rate hike after the beginning of this year would have to be reviewed.

Gift card protections
Starting August 22nd, all prepaid gift cards must be good for at least five years. If you have a gift card and with an expiration date on it sooner than that, any leftover money must be honored for at least five years. You can also request a free replacement for any expired gift card.

No more inactivity fees
These fees will now be banned. Even if they are called by another name, such fees are no longer allowed. For example, if your card has an annual fee that's waived if you spend a certain amount, that is an inactivity fee and that will not be allowed.

Short Sale on Your Income Property? - You May Owe the IRS Big Time

Remember last month when I talked about how you may owe taxes after a short sale on your personal residence? The same problem may happen if you have an investment property with problems. Depending on your situation, especially how much you owe on your property and to whom, you may have a huge tax problem on your hands.


Plenty of help for a primary residence
Over the past few years, there have been a number of new laws and government programs set up to help homeowers. For example, the Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief, and these advantages will be in place until 2012. Also, as the economy continues to be rough for the average taxpayer, there will be continued political pressure to provide relief in the form of tax breaks and rule changes.

Why investment properties are different
To put it simply, an investment property is not a primary residence, so many of the breaks that homeowners get when it comes to tax breaks for forgiven debt doesn't exist. For example, if you are personally insolvent on the day that you do a short sale on a personal residence, you probably don't owe any taxes on the value of the forgiven debt. If the same thing happens with an investment property, it isn't a personal residence, and you may owe on the forgiven debt.

Nightmare scenario: you lost money but still owe taxes
There are many ways that this can happen, and the following is an easy to follow example. An investor bought a four-unit apartment house for 0% down three years ago, and the rent from the tenants easily covered the mortgages and other costs. In the last year, two very bad things happened - real estate prices dropped 30%, three of the tenants moved out or just stopped paying rent, and you are bleeding money like crazy. You find another investor who takes it off your hands, and you think you are lucky because the mortgage holder allowed a short sale on your property.

Things look great until a few months later when you get the 1099C from the mortgage holder and you realize that the forgiven debt is considered income, and you owe taxes on the difference between the purchase price and the sale price. The only problem is your apartment house was your only significant investment, and after you sold it and took care of all the other costs, you were living paycheck to paycheck. You have a tax bill that is is equal to your annual income, and Uncle Sam doesn't want a sad story, he wants you to show him the money.

How to deal with this problem
The best way to deal with the problem is to avoid it by not selling the property. If this is not an option, then it is time to get either creative or proactive. Creative would be working with the mortgage holder to change the terms of the deal, or working with real estate management company to find paying tenants. If you have no choice but to sell, then at least prepare for the consequences by contacting the IRS about your situation. They will still want their money, but they may be open to negotiating a payment agreement with you.

Short sellers, who get lenders to forgive a portion of the debt in order to complete a sale, are also at risk because lenders will often leave their options open to come back and collect later. If you are involved in a short sale, make sure to review your agreements carefully, preferably with the help of a competent professional.

Photo credit: Wikipedia

Recovery Act can save you money on your 2009 tax bill

In February 2009, President Obama signed into law the American Recovery and Reinvestment Act, or Recovery Act, into law. One of the benefits of the law is that you may be able to get tax credits or tax reductions for your 2009 taxes.

To give you an idea of what benefits you can get, you can review the tax savings checklist on the White House web site that will give you an idea of what benefits you can get.

If you go through this checklist, you will have an idea of what you should look for when you do your taxes. A tax program like TurboTax, or a tax professional, may be able to find these benefits as well, but you should still go through this checklist so you will know what to look for or what to ask when it comes time to do your taxes.

Video about the Tax Savings Tool

First time homebuyer? - You may get $8,000 back from the IRS

Last November, the US government passed a law that lets any eligible taxpayer get an $8,000 deduction on your 2009 taxes. The credit reduces your tax bill or increases his or her refund, dollar for dollar. The first-time homebuyer credit is different from most tax credits in that if you are eligible whether or not you owe any taxes. For a home buyer, this is the closest thing to free money that you will see any time soon.

Top 10 things you should know
1. You must buy – or enter into a binding contract to buy a principal residence – on or before April 30, 2010.

2. If you enter into a binding contract by April 30, 2010 you must close on the home on or before June 30, 2010.

3. For qualifying purchases in 2010, you will have the option of claiming the credit on either your 2009 or 2010 return.

4. A long-time resident of the same home can now qualify for a reduced credit. You can qualify for the credit if you’ve lived in the same principal residence for any five-consecutive year period during the eight-year period that ended on the date the new home is purchased and the settlement date is after November 6, 2009.

5. The maximum credit for long-time residents is $6,500. However, married individuals filing separately are limited to $3,250.

6. People with higher incomes can now qualify for the credit. The new law raises the income limits for homes purchased after November 6, 2009. The full credit is available to taxpayers with modified adjusted gross incomes up to $125,000, or $225,000 for joint filers.

7. The IRS will issue a December 2009 revision of Form 5405 to claim this credit. The December 2009 form must be used for homes purchased after November 6, 2009 – whether the credit is claimed for 2008 or for 2009 – and for all home purchases that are claimed on 2009 returns.

8. No credit is available if the purchase price of the home exceeds $800,000.

9. The purchaser must be at least 18 years old on the date of purchase. For a married couple, only one spouse must meet this age requirement.

10. A dependent is not eligible to claim the credit.

Your situation may be different, but basically you can get the full benefit if

For qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 return.

Special IRS requirements

Because of the documentation requirements for claiming the credit, taxpayers who claim the credit on their 2009 tax return must file a paper — not electronic — return and attach Form 5405, First-Time Homebuyer Credit and Repayment of the Credit (see the Form 5405 instructions), and a properly executed copy of a settlement statement used to complete the purchase.

Check out the IRS Video

Where to go for more information
IRS information page on this tax credit
IRS news release March 18,2010
IRS news release Novemer 24, 2009

Do you qualify? - Take the quiz
You can take the Zillow quiz in the right column of this site to see if you qualify.

Government makes it easier to get at your Social Security Check

Until recently, if you got a Social Security check from the federal government, there were limits to what the government could do to take money out of your check to pay off debts you may have owed to Uncle Sam. According to a recent story in the Wall Street Journal, defaulted student loans, unpaid farm or small business loans, unpaid income taxes, and even money veterans may have owed the government for health care were just some of the government debts that could have been paid out of that check.

Until recently, one of the biggest limitations was that in most cases the government could only collect on debts that were less than ten years old. Because of changes in the law caused by the 2008 Farm Bill, that is no longer the case. Prior to those changes, only federal student loan delinquencies weren't subject to the ten year statue of limitations.

While the news will be bad for some, it doesn't have to be catastrophic. For example, for most debts, the government can withhold a maximum of 15% of your benefits, and the reduction in benefits can't drop below $750 per month.

Why is the government doing this?
As is often the case with changes in federal laws and regulations, if you follow the money, the changes may make sense. The Wall Street Journal reported that in 2001, roughly 1.6% of the delinquent debt collected by the Treasury Department came from withholding Social Security payments rather than other sources like federal tax refunds. In 2008, the percentage went up to 10.8%. Given the aging of the population and increasing unemployment, perhaps the Treasury department and elected federal officials are looking to Social Security payments as a bigger growth area than tax refunds, and and changing the rules to make it easier to put their hands on it.

What if you are affected?
The good news is that if you the government starts to hold back some of your Social Security payments, and you think that they might be wrong, you have the right to review and copy your files, negotiate a different payment arrangement, and apply for waivers due to a disability or other hardships.

You may still owe money after a foreclosure or short sale

So your house was under water and you thought you could deal with your problem by having a short sale and moving on with your life. Maybe you got foreclosed on and you thought that the nightmare ended then. Think again. You may be on the hook for paying off part or all of the remaining mortgage, even years later.

Foreclosure is not the end of the story
Most states, like Florida where about half of the homes are underwater, allow mortgage holders to collect on the unpaid portion of the mortgage after a foreclosure. In Florida, the courts give mortgage holders up to five years to seek a favorable judgment, and up to 20 years to collect. It may be different in your state, Arizona, California, and about one in three of the remaining states prohibit collection efforts on a primary residence after foreclosure.

The government may help you, but not that much
The federal government started the Home Affordable Modification Program to help homeowners who have financing their mortgage at a lower rate, but it is pretty restrictive. Your first mortgage can't be more than 125% of the current market value of your home, your mortgage has to be guaranteed by Fannie Mae or Freddie Mac, and you have to have no late payments in the previous 12 months. If you are either seriously underwater by more than 25%, or if you are already in the foreclosure process, you're (sorry) out of luck.

Who is most likely to get hit?
Not surprisingly, banks and mortgage holders would prefer to go after people who have assets or income. Homeowners who can afford to make payments, but decide to walk away from an underwater mortgage, sometimes called a rational default or a strategic default, are at risk if they don't have any other serious financial issues and have otherwise good credit.

Short sellers, who get lenders to forgive a portion of the debt in order to complete a sale, are also at risk because lenders will often leave their options open to come back and collect later. If you are involved in a short sale, make sure to review your agreements carefully, preferably with the help of a competent professional.

Those who have been foreclosed upon may also be at risk. Because the details of each foreclosure are very different, if you have been foreclosed upon or at risk of having that happen, check your mortgage agreement details very carefully to get a realistic idea of what issues you may be facing down the road.

Photo credit: respres

Short Sales and Taxes - IRS Gives You a Break

If you have to sell a house with an underwater mortgage, your lender may forgive a portion of the debt. If this happens, the IRS looks at the forgiven debt as income that may be taxable. The good news for many homeowners is that the government may cut you some slack and not may you pay taxes on the forgiven debt.

The Mortgage Debt Relief Act of 2007 allows many homeowners to exclude income from the discharge of debt on their principal residence. This isn't only for short sales. You may get a tax break even if you debt is reduced through mortgage restructuring, or if part or all of a mortgage is forgiven in a foreclosure.

This provision applies to debt forgiven from 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion if you are married and filing jointly, and $1 million if married filing and separately. This tax break applies only if the forgiven debt is directly related to a decline in the home’s value or the taxpayer’s financial condition.

The following are the most commonly asked questions and answers about The Mortgage Forgiveness Debt Relief Act and debt cancellation:

What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, the amount that you didn't pay back is normally reportable as income because you no longer have an obligation to repay the lender.

Here’s a simple example of forgiven debt. You borrowed $10,000 but defaulted after paying off $2,000 of the principle. If the lender can't collect the remaining $8,000, that amount is considered taxable income in most cases.

When is cancellation of debt not taxable?
The most common situations when cancellation of debt income is not taxable is when it involves:

• A qualified principal residence (This is what the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
  
• Debts discharged through bankruptcy.
  
• Insolvency (when your total debts are more than the fair market value of your total assets).
  
• Non-recourse loans, which is a loan where you are not personally responsible because the property being financed is used as collateral.

Your particular case may be more complicated, so if you are confused, hire professional tax or legal help.

What if I don't tell the IRS?
Don't count on getting away with it by not telling the IRS. The lender is usually required to report the amount of the canceled debt to you (using Form 1099-C) and to the IRS. The amount of debt forgiven must be reported on IRS Form 982 and this form must be attached to your tax return. If you don't report it, and the IRS expects to see you mention it in a tax return, you could be headed for an audit.

Related Resources
More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.