The American Nightmare

Regardless of which party is in power the new preferred method of regulation from Washington is through the tax code. As a result it is important for any attorney to understand basic tax issues even if you refer clients elsewhere. With new client opportunities in the tax field you may want to consider volunteering with Administer Justice for experience to help clients who cannot afford professional help and to gain valuable skills to represent those who can afford such help. Visit www.administerjustice.org, call 847-844-1100 or e-mail our volunteer program services coordinator Teri Jacobs at tjacobs@administerjustice.org.

1. Buying into the American Dream. The American Recovery and Reinvestment Act of 2009, 26 USC 1001. The economic stimulus act contained a provision in Section 1006 for a refundable first-time home buyer credit.

What is it? A credit on taxes for buying a home. That’s a government give away.
Who can get it? Any U.S. Citizen or Resident Alien buying a home for the first time after April 9, 2008. No ITIN holders.
How much is it? Up to $8,000 (10% of the purchase), but if you sell the home within three years you must repay the money.
How do I get it? Apply for it on your 2009 taxes. If purchased in 2008 under former interest free loan provision can file 1040x to amend.
Is there a cut off? The credit phases out for incomes over $75,000 ($150,000 for married couples).

2. Keeping the Dream Alive.
Illinois – Homeowner Rights Act, 735 ILCS 5/15-1504.5, effective 1/1/09.
Attorney General – Homeowner Helpline (866) 544-7151.
"We have repeatedly found that these foreclosure rescue operations are swindling desperate homeowners out of money they can't afford to lose," said Attorney General Madigan. "Struggling homeowners need to know that free help is available. The 24 lawsuits I have filed prove foreclosure rescue operators don't help. They don't call your lender, they don't modify your loan, and they don't represent you in court if you're in foreclosure. All they do is take your money.”

Federal – Making Home Affordable, www.makinghomeaffordable.gov (Feb. 18, 2009); Hope for Homeowners and Second Lien Program (April 28, 2009).
• Modifies loans to 38% of income then pays lender to reduce to 31% of income. Interest reduced to as low as 2% and if still not at target level can extend to 40 years
• Only owner occupied home, do not need to be in default.
• Capped for five years then can adjust 1% per year until reach conforming loan survey rate
• Servicers receive $1,000 fee to process plus $1,000 per year for up to three years for every loan sustained over that time.
• If borrower stays current they receive $1,000 each year for five years.
• If borrower can’t meet eligibility then they can receive a $1,500 relocation payment to help effectuate a short sale or deed-in-lieu of foreclosure.
• Mortgage must have originated before January 1, 2009 and new borrower will be accepted until December 31, 2012.
• Any foreclosure action is temporarily suspended during a trial period to allow a homeowner to determine if a foreclosure alternative is available.

Example – Harry Homeowner purchased a home in 2004 for $159,700 (the average home cost 2000 census). He and his wife, Halle both worked earning $59,351 (the average household wage, 2000 census). The principal, interest, PMI and tax monthly payment is $1,620. Halle loses her job and the household income is now $30,394 (average per person income). This is how the loan modification program would work.

This is a significant modification. In addition to saving $10,020 a year in payments, Harry and Halle will receive $1,000 per year for five years for a total savings of $50,100 in reduced payments and $5,000 in incentive payments. How these incentive payments will be reported and treated from a tax perspective is yet to be determined.

3. A recurring nightmare. Mortgage Forgiveness Debt Relief Act of 2007, 26 USC 108(a)(1)(E).

The first wave of foreclosure – losing your home. The effect of the Obama plan on foreclosures is not yet known. What is known is the seriousness of the foreclosure nightmare:
• Illinois ranks third in the country for mortgage fraud (Mortgage Asset Research Institute Report, March 2009)
• Kane County has a 9.8% unemployment rate (Feb. 2009) which is higher than Chicago and the surrounding suburbs.
• Kane County has the second greatest foreclosure increase in the Chicago area – up 115%.
• Kane County leads the collar counties with a 16% asset poverty rate meaning a household with less than three months poverty level savings.
• 25.5% of Kane County is below 200% of the poverty line or 127,760 people.
The second wave of foreclosure – Just when you thought it could not get worse the tax man cometh.

Example: Fred Krueger and his wife, Nancy Thompson, purchase a home in Winnebago County in 2004 for $335,000. They put $15,000 down and financed the remaining $320,000. In 2006, Fred and Nancy refinance for $350,000 and use $30,000 to pay off credit cards and pay for college tuition for their daughter. The fair market value of the property was $380,000. In 2008, Nancy leaves the home, moves to Kane County and files for divorce. Fred is depressed and loses his job. Craven Bank forecloses on the property which now has a payoff of $345,000 and a fair market value of $300,000.

Nancy receives a 1099-C on the Elm Street property in February 2009. The form is attached. Proactive discovery forms from the divorce proceeding are used to complete the attached insolvency worksheet. Nancy comes to you for help.
How can you save Nancy Thompson from Freddy Krueger and the Nightmare on Elm Street?
 
Cancellation of Debt – Internal revenue code (IRC) Section 61(a)(12) includes in gross income “income from discharge of indebtedness.” Could be credit card, auto repossession, foreclosure or other.

Form 1099-A is an informational form used by a lender to indicate they have acquired an interest in the property.

Form 1099-C is the form to report cancelled debt of $600 or more.

Practice Tip: Examine the 1099-C for correct listing of debt in box 2 and review box 7’s fair market value. If either of these is incorrect contact the lender to try to get a corrected 1099.

In the example box 2 incorrectly list the entire debt - $345,000 – instead of $45,000.

Next step is to see if any exceptions or exclusions apply. In doing so ordering rules set forth at 26 USC 108(a)(2)(C) apply. Importantly the principal residence exclusion takes precedence over the insolvency exclusion unless the taxpayer specifies otherwise.

Exceptions: Amounts otherwise excluded from income
Certain student loans
Deductible debt, for taxpayers using the cash method of accounting, and
Price reduced after purchase

Exclusions: Bankruptcy (Chapter 11)
Insolvency
Qualified Farm indebtedness
Qualified real property business indebtedness
Qualified principal residence indebtedness, and
Certain non-business debt of a qualified individual because of the Midwestern disasters.

In the example Nancy will not have any exceptions but may have three possible exclusions:

Insolvency - Nancy and Fred had $45,000 in cancelled debt income. In completing the insolvency chart the extent of insolvency (line 40) is $20,000 which would leave $25,000 in cancelled debt income. This is probably not a good choice.

Qualified Principal Residence –
According to IRC Sec. 163(h)(3)(B) debt incurred in acquiring, constructing or substantially improving a principal residence and secured by the principal residence and either there is a decline in the principal residence’s value or in the taxpayer’s financial situation. Not included is debt unrelated to the principal residence – no home equity loans or use of funds for other purposes. The debt must be discharged on or after Jan. 1, 2007 and before January 1, 2013.

In the example Nancy had $45,000 in cancelled debt income but $30,000 is credit card debt so she can only exclude $15,000, leaving $30,000 in cancelled debt income.

Non-business debt of a qualified individual because of the Midwestern disasters -
Publication 4681 and Publication 4492-B lay out the exception for areas affected by flooding between May 30 and July 31, 2008. Table one list states and counties which can exclude COD income in all circumstances while table two has limited circumstances and requires damage proof. In Illinois table one includes Adams, Calhoun, Clark, Coles, Crawford, Cumberland, Douglas, Edgar, Hancock, Henderson, Jasper, Jersey, Lake, Lawrence, Mercer, Rock Island, Whiteside, and Winnebago Counties.

In the example the home is located in Winnebago County and the foreclosure took place after June 1, 2008 and before January 1, 2010 so Nancy could exclude the income on that basis. In this case a natural disaster seems to have spared her from a tax disaster. She will still need to calculate gain or loss on the worksheet on Form 982 which she needs to complete and file with her return. In this case she has a loss of $35,000 (purchase price – FMV at time of disposition), but with a principal residence the exclusion under section 121 of the tax code would likely apply.

Final Note: Congress is not done in this area and new provisions may be passed. The National Taxpayer Advocates report to Congress contained recommendations concerning cancellation of debt including removing taxpayers with modest amounts of debt cancellation from the COD regime; providing an insolvency worksheet for taxpayers (this was done in April and is the sheet used in these materials); and creating a centralized unit in the IRS dedicated to handling COD issues.

The American Recovery and Reinvestment Act of 2009 (26 USC 1001)

If you suffer from insomnia and would like to read the nearly 500 page bill you will find it at this link: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h1enr.pdf Assuming you would prefer to have a good summary of the most common provisions effecting families, they are summarized below:

TAX RELIEF FOR INDIVIDUALS AND FAMILIES

Sec. 36A (26 USC 36A) “Making Work Pay” Tax Credit. For 2009 and 2010, the Act provides a refundable tax credit of up to $400 for working individuals and $800 for working families. This tax credit would be calculated at a rate of 6.2% of earned income, and would phase out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 for married couples filing jointly). Taxpayers can receive this benefit through a reduction in the amount of income tax that is withheld from their paychecks, or through claiming the credit on their tax returns. Non-resident aliens with ITIN’s are not eligible.

Sec. 1002 (26 USC 1002) Increase in Earned Income Tax Credit. The Act temporarily increases the earned income tax credit for working families with three or more children. Under current law, working families with two or more children currently qualify for an earned income tax credit equal to forty percent (40%) of the family’s first $12,570 of earned income. This credit is subject to a phase-out for working families with adjusted gross income in excess of $16,420 ($19,540 for married couples filing jointly). The Act increases the earned income tax credit to forty-five percent (45%) of the family’s first $12,570 of earned income for families with three or more children and would increase the beginning point of the phase-out range for all married couples filing a joint return (regardless of the number of children) by $1,880.

Sec. 1003. Increase Refundable Portion of Child Credit. For 2008, the child tax credit is refundable to the extent of 15 percent of the taxpayer’s earned income in excess of $8,500. For 2009 and 2010 the Act reduce this floor to $3,000.

Sec. 1004. “American Opportunity” Education Tax Credit. The Act provides financial assistance for individuals seeking a college education. For 2009 and 2010, the Act amends the Hope Scholarship Credit by providing taxpayers with a new “American Opportunity” tax credit of up to $2,500 of the cost of tuition and related expenses paid during the taxable year. Under this new tax credit, taxpayers will receive a tax credit based on one hundred percent (100%) of the first $2,000 of tuition and related expenses (including books) paid during the taxable year and twenty-five percent (25%) of the next $2,000 ($2,000-$4,000) of tuition and related expenses paid during the taxable year. Forty percent (40%) of the credit would be refundable. The credit extends beyond the current first two years of college and now goes through four years. This tax credit will be subject to a phase-out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly). The credit is also allowed against the alternative minimum tax. As a part of this Act the Secretary of Education is to study coordination with the Pell Grant program and the feasibility of requiring including community service as a condition of taking their tuition and related expenses into account under Sec. 25A of the Internal Revenue Code.

Sec. 1005. Computers as Qualified Education Expenses in 529 Education Plans. Section 529 Education Plans are tax-advantaged savings plans that cover all qualified education expenses, including: tuition, room & board, mandatory fees and books. The Act provides that computers and computer technology qualify as qualified education expenses in 2009 and 2010.

Sec. 1006. Refundable First-time Home Buyer Credit. Last year, Congress provided taxpayers with a refundable tax credit that was equivalent to an interest-free loan equal to 10 percent of the purchase of a home (up to $7,500) by first-time home buyers. The provision applies to homes purchased on or after April 9, 2008 and before July 1, 2009. Taxpayers receiving this tax credit are currently required to repay any amount received under this provision back to the government over 15 years in equal installments, or, if earlier, when the home is sold. The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return). The Act eliminates the repayment obligation for taxpayers that purchase homes after January 1, 2009, increases the maximum value of the credit to $8,000, and removes the prohibition on financing by mortgage revenue bonds, and extends the availability of the credit for homes purchased before December 1, 2009. The provision would retain the credit recapture if the house is sold within three years of purchase.

Sec. 1007. Temporary Suspension of Taxation of Unemployment Benefits. Under current law, all federal unemployment benefits are subject to taxation. The average unemployment benefit is approximately $300 per month. For 2009 the Act suspends federal income tax on the first $2,400 of unemployment benefits per recipient.

Sec. 1008. Additional Sales Tax Deduction for Vehicle Purchases. The Act provides all taxpayers with a deduction for State and local sales and excise taxes paid on the purchase of new cars, light truck, recreational vehicles (motor homes), and motorcycles through 2009 which cost less than $49,500. This deduction is subject to a phase-out for taxpayers with adjusted gross income in excess of $125,000 ($250,000 in the case of a joint return).
Extension of AMT Relief for 2009. The Act provides more than 26 million families with tax relief in 2009 by extending AMT relief for nonrefundable personal credits and increasing the AMT exemption amount to $70,950 for joint filers and $46,700 for individuals.

Sec. 2201, 2202. Economic Recovery Payment to Recipients of Social Security, SSI, Federal and State Pensiioners, Railroad Retirement and Veterans Disability Compensation Benefits. The Act provides a one-time payment of $250 to government retirees not eligible for Social Security, retirees, disabled individuals and SSI recipients receiving benefits from the Social Security Administration, Railroad Retirement beneficiaries, and disabled veterans receiving benefits from the U.S. Department of Veterans Affairs. The one-time payment is a reduction to any allowable Making Work Pay credit.

There are many other provisions which relate to government agencies, businesses, appropriations and departmental implimentation but these are the primary provisions effecting families. If you would like more information or have questions please contact us by e-mail at help@administerjustice.org.

Administer Justice is a charitable low-income legal and tax service provider. The low-income taxpayer clinic is designed to provide education in tax matters and intervention in disputes with the IRS.

Painful reality: Penny-pinching proposals

Printed in the Courier News

April 24, 2008

BY GLORIA CARR Staff Writer
Everything in Ted Jones' grocery cart was on sale.
The best buy was a dozen eggs for 99 cents with an in-store coupon at a local grocery store.

On the Net
• Family Service Association of the Greater Elgin Area:
http://www.fsaelgin.org/
• Administer Justice:
http://www.administerjustice.org/

Jones, like everyone else, has noticed a significant price increase in just about everything he buys. Everyone he talks to mentions the rising prices.

"It doesn't help that we are not in 'an official recession,'" Jones said. "Your pocketbook feels like it's a recession."

The average cost for eggs is around $2.16 a dozen, according to the American Farm Bureau Federation. The AFBF's MarketBasket Survey showed the total cost for the 16 basic grocery items increase about 8 percent in the first quarter of 2008.

While costs continue rising, median incomes have dropped in Kane and DuPage counties by $8,000, according to a new report by the Heartland Alliance. A total of 46,823 people are living in extreme poverty with an income of $10,000 or less, according to the study.

Average working people are caught trying to make ends meet. Ann Rodriguez sees the people who are struggling. She is program director of the Consumer Credit Counseling Service of Family Service Association of Greater Elgin Area.

The agency, which provides financial counseling, sees an average of 90 to 100 clients a month, she said. It's an increase over this time last year, and the clients range from those making $30,000 a year to those making $100,000 a year, Rodriguez said.

"We are seeing a lot of white-collar professionals coming in here," compared to previous years, she said. "People are coming in now for housing problems. They cannot pay their mortgage or foresee they won't pay in coming months due to loss of income or a decrease in income."
CCCS provides financial counseling to help anyone get out of debt. There is a $20 fee, which can be waived in certain circumstances. It recently received a grant to provide counseling for people facing foreclosure.

Rodriguez offers practical tips for anyone trying to cut back:
Stop eating out
"You can't eat out every week if you can't pay your mortgage," Rodriguez said. Experts agree that packing lunches and cooking dinner at home will help generate extra money at the end of the month.
Make a grocery list
Write a list of what you need and search for sales fliers for the best deals. Rodriguez does not recommend going store to store for items just to save 10 cents because it will cost you more in gas.
Buy only what you need
Rodriguez repeats this again. "Buy only what you need, period," she said. If you don't need it, don't buy it. This applies to anything -- groceries, clothing, shoes, etc.
Use coupons
Take advantage of manufacturer's or store coupons, Rodriguez said. Also, find out what days sales are held to get the best deals.
Create a budget
And, more importantly, follow it, she said. CCCS counselors develop a budget for every client. Budgets can work, Rodriguez said.

Judy Berndt is a lawyer with Administer Justice in West Dundee (pictured above right speaking to a group on financial, tax and legal issues). She offers bankruptcy, tax law and financial advice. Administer Justice sees people at or below the poverty level, however, many people who were previously considered middle income are finding themselves in that category due to layoffs or pensions that have gone bust, she said.

"It's so hard. Many of our clients are living from paycheck to paycheck," she said. "If they have one disaster, the dominos come falling down."

Her immediate advice for people in dire financial straits is to find help from places such as The Salvation Army, food pantries or social service agencies.

Berndt has common sense tips -- such as shopping at resale stores or holding clothing swaps with family or friends -- to save money during tough times.

She also recommends using coupons, buying groceries that are on sale or shopping at discount grocery stores. If meat is on sale, that's what you will eat, she said. If chicken is on sale, that is what you will eat. Eat leftovers, and instead of buying salad bags, buy whole lettuce and cut it up yourself, she said.

These are all common sense things, but "whoever said 'common sense is not so common' is right," Berndt said. "Our standard of living is so high, we forget ways people have routinely economized."

Jones uses coupons and has always budgeted. He is just watching that budget more closely now, he said.

He doesn't see an end to the rising cost of living.

"I would think this will last for a while," Jones said. "We will have to live differently than we have in the past."

Cinco de Mayo

Cinco de Mayo Myth. Contrary to popular opinion, the 5th of May is not Mexican Independence Day. Mexico declared its independence from mother Spain on midnight, the 15th of September, 1810. And it took 11 years before the first Spanish soldiers were told and forced to leave Mexico. So, why celebrate Cinco de Mayo?

Cinco de Mayo Milestone. While Cinco de Mayo may not be the actual day of independence it is an appropriate day to celebrate. On the morning of May 5, 1862, 4,000 Mexican soldiers smashed the French and traitor Mexican army of 8,000 at Puebla, Mexico, 100 miles east of Mexico City. The French had landed in Mexico (along with Spanish and English troops) five months earlier on the pretext of collecting Mexican debts from the newly elected government of democratic President (and Indian) Benito Juarez. The English and Spanish quickly made deals and left. The French, however, had different ideas. They were going to conquer Mexico. However, with the help of American weapons and some forces the Mexican army soundly defeated the French.

Cinco de Mayo Message. There are several messages we can learn from Cinco de Mayo. One would be to never give up. Though facing an army twice their size the Mexicans never gave up hope. Another would be the value of friends. Mexicans remembered America's assistance and years later rushed to help us following Pearl Harbor. We sadly forget our history and too often Mexicans today are seen not as friends but as an invading force of their own. Administer Justice wants to rebuild our historical friendship and for this reason runs a low-income taxpayer clinic to help Spanish-speaking individuals understand their rights under our complex tax laws. Still another lesson would be the deceitfulness of debt. Under the guise of collecting debts the French invaded, and before we realize it we often find ourselves beseiged by debt as well. But never give up hope, there are friends willing to help.

Cinco de Mayo Model. It is a good model to not give up hope even when it seems hopeless. It is another good model to ask for help from someone with the proper weapons/tools. At Administer Justice we want to help everyone live debt-free, worry-free lives. We know that can best be accomplished by a proper understanding that all that we have belongs to God and not us - we are caretakers only. If we thought of ourselves as managers and not owners and understood that the actual owner had promised to meet all of our needs we could face the forces aligned against us with much greater confidence. Unfortunately as Jesus told us we are like "seed sown among thorns, that hear the word; but the worries of this life, the deceitfulness of wealth and the desire for other things come in and choke the word, making it unfrutiful." Mark 4:18-19. That is not Jesus desire for us. Like the prodigal son who spent his money, didn't have a good job and was in desperate need of help, God wants us to return to him so he can throw us a party. Happy Cinco de Mayo!

COMMENTS?! For more information on our services or for assistance e-mail Dennis. For information about Administer Justice visit our web site at www.administerjustice.org.