You can apply for income tax relief for up to $2 million (or $1 million if married and filing separately) in debt that is cancelled, or forgiven, by your mortgage lender on your primary residence. The law has been extended through 2012 under the Emergency Economic Stabilization Act.

If you have lost your home through foreclosure or have restructured your mortgage loan, you may qualify for this tax relief under the extended tax law called the Mortgage Forgiveness Debt Relief Act of 2007. The claim can be made by using IRS Form 982.

There are two qualifying factors that must be met on the mortgage debt exclusion: 1) it must be your primary home, and 2) the debt must have been used to buy, build, or make substantial improvements to the residence to which the mortgage applies. Certain business or farm property may also qualify for tax-free treatment, so check with your accountant or tax attorney in this situation.

When a lender forgives debt, it is typically a taxable event. You would receive a 1099-C (Cancellation of Debt) and the income would be claimed on Line 21 on your personal 1040 income tax Form. (IRS Publication 525)

While mortgages for second homes and rental properties do not qualify for the exclusion, some or all of this debt might qualify for other exclusions if you are insolvent at the time the debt was settled.

Canceled credit debt does not have to be included in income if it was a gift, or if the individual is insolvent, or in a bankruptcy case. The exclusion for insolvency is particularly important in this case, because it will likely apply to borrowers with home equity loans or mortgages on second homes and rental properties, and will be helpful in this situation. This is an important point for borrowers whose property has dropped in value below what is owed on the mortgage.

According to the IRS, “A debtor is insolvent when, and to the extent, the debtor’s liabilities exceed the FMV (fair market value) of the assets. Determine the debtor’s liabilities and the FMV (fair market value) of the assets immediately before the cancellation of the debtor’s debt to determine whether or not the debtor is insolvent and the amount by which the debtor is insolvent.”  (IRS Publication 908)

The value of all of your assets and all of the liabilities you owe have to be calculated to figure out if you are insolvent, and by what amount, so as always, check with your professional accountant to see how you can best take advantage of these tax relief measures for exclusions of cancelled or settled credit  and mortgage debts.

REMINDER:

Corporate tax returns are due March 15th and extension deadline filing is September 15th

Personal tax returns are due April 15th and extension deadline filing is October 15th

Use these 7 smart money management tips for safe shopping.

1 – Try to use cash or a debit card instead of a credit card to keep from increasing your debt. If you use a credit card, pay off the balance as soon as your statement arrives.

2 – When you do use a credit card, check your statement to see if it is a daily or monthly interest rate card. If it is a daily interest card, pay it off online as soon as the charge hits your card to stop the interest compounding every day until you do pay.

3 – Never allow the cashier to leave your card lying on the counter where someone can read, or snap a photo of, the card information.

I have a client who had someone use a cell phone to photograph their card when the cashier placed in face up on the counter rather than handing it back to my client, and then use my client’s card to wire money from Western Union to their brother in another state. I caught it when I saw the $600 charge and asked my client about the charge.

4 – If you are shopping online, use a Credit Card because it offers more protection for online shopping than debit cards.

If fraudulent charges are made with a debit card and you don’t report the activity within two days, you can be held liable for up to $500. On the other hand, if unauthorized purchases are made on your credit card, U.S. Federal law limits your liability to just $50, and in most cases the credit card issuer will waive that fee.

5 – Check your card statement for fraudulent charges online or as soon as you receive it in the mail. You may face unlimited liability if you fail to report the fraudulent charge within 60 days of receiving of the statement that lists the fraudulent purchases.

6 – When shopping online, make sure your computer has the latest virus and spy protection software.

7 – When shopping online be sure to shop only on trusted and secure sites with https:// as the URL in the web address bar at the top of the screen. The “s” is the signal that the website is secure. You can also look for a closed padlock icon on the bottom of the screen in the shopping cart areas.

What other good tips can you think of? Leave them in a comment.

Many people set new goals for the New Year…losing weight…stopping smoking…cleaning out closets…but what about your financial goals?

If you set your financial goals, business and personal, and get to work figuring out how to reach those goals, you can improve your financial condition.

Make your goals realistic but make them a bit of a stretch too…after all the point is you need to be able to plan on how you are going to reach the goal. Don’t just pull a number out of thin air and then getting discouraged because there is no way you are going to make it.

One way to start your plan is to work backwards, starting with what you want to achieve.

Wealth can be measured by your net worth, so that is the place to start. Figure out what your personal net worth is right now by adding up the value of all of the assets you own and subtracting everything you owe (mortgage, car loan, credit card debt, etc.) Then set a goal of increasing your net worth by some percentage. Work out what you will pay on the amounts you owe without adding any additional liabilities like paying for things you can’t afford with credit cards, and then add a goal for some cash savings that will increase your net worth. That’s two more goals, spend less and save more.

Actions to increase your net worth:

1 – Pay down the principal on your liabilities like the mortgage or car loans

2 – Pay down credit card debt and stop using the cards unless you can pay off the balance in full when you get the monthly statement.

3 – Find ways to cut expenses – we all spend on items that are optional, right?

4 – Put a portion of every paycheck into cash savings toward an emergency fund (set a goal for the amount you want to reach in that fund)

5 – Once your emergency fund is built up, start putting some cash into investments that will grow (don’t overlook the benefits of a retirement savings plan account which can also reduce your income tax liability)

Next step: How much more personal income will you need to achieve that increase in net worth and pay all of the bills you will incur during the year? That number is the basis for setting the goal for an increase in your personal income. If you are earning $60,000 a year now, and you will need to earn $70,000 to make the net worth goal, then figure out what you have to do to make that happen.

The actions you take will differ based on whether you are a business owner or an employee, of course.

If you work for someone else, then the assets you have to sell to increase your income are skills and time. You can increase your skills and make yourself more valuable to your current company and ask to take on more responsibility for more pay. Or, you can get a second job or start your own money-making entrepreneurial activity that you can work on in your spare time.

Don’t overlook cutting back on discretionary expenses. You can save money on restaurant meals when you dine out by buying gift certificates for your own use for a fraction of their worth at http://tinyurl.com/restaurant-gift-certs-4-less and they make great gifts for giving to others.

As a business owner, your increased personal income demand is placed on your business. That means working out a plan to generate more sales and cut expenses wherever possible to pay you a salary increase and cover the increase of the cost of doing business in the coming year.

So, working backwards in the equation, how much of an increase in sales do you need to make that goal? How can you use your cash flow more effectively to generate more cash? Where can you cut expenses without harming the income production and profits of your business?

Becoming financially fit is not all that different from becoming physically fit. You start where you are and train yourself to use discipline and your brain power to perform better and make small, consistent improvements every day. Before you know it, you’re on your way to achieving your financial goals for the new year and better money management habits become second nature.

Money Saving Tips:

Save money on restaurant meals;  buy gift certificates for a fraction of their worth

Lose the fax phone line: Send and receive secure faxes by email and never miss another fax

Buy ink and toner at deep discounts and opt-in to receive the additional coupons by email to save an additional 10 – 15%

Buy shipping supplies at good prices and get cool FREE stuff for yourself or gift giving

Automatically protect your computer files for pennies a day

Do you have other great money saving ideas? Leave a comment and share them with our readers.

Many taxpayers who owe taxes believe tax extensions protect them, but they are only partially right. Do you know the rules and deadlines for filing corporate and personal tax extensions? For companies it is March 15 and for personal tax returns it is April 15.

Here’s the ugly truth about tax extensions, but first if you need to file one, do it before midnight on the deadline by using Form 7004 for a company that you can get here: http://www.irs.gov/pub/irs-pdf/f7004.pdf or Form 4868 for personal extensions that you can get here: http://www.irs.gov/pub/irs-pdf/f4868.pdf

Penalty for not filing tax returns on time

The IRS is much worse than any credit card company, charging a 5% PER MONTH penalty up to 25% of what you owe for late filing that compounds DAILY. That’s a whopping 60% per year, even if you did file an extension!

Interest charges for late filing of tax returns

As of midnight on tax deadline day, the interest on any taxes you owe, but do not pay, with your return accrues at the rate of 3% PER MONTH up to 25% of what you owe for late filing that compounds DAILY. That’s a whopping 36% per year!

The total? A unbearable 8% per month (96% per year) compounding daily. Another “Pay For Life” program.

If you can’t pay what you owe, ask for a payment plan by filing Form 9465 Installment Agreement Request that you can get here: http://www.irs.gov/pub/irs-pdf/f9465.pdf

Note: the caution on the form that states: Do not file this form if you are currently making payments on an installment agreement or can pay your balance due in full within 120 days. Instead, call 1-800-829-1040. And yes, unfortunately, interest and penalties continue until it is paid in full.

The remedy is paying quarterly estimated tax payments if you owe taxes each year. At least what you pay in these payments cannot accrue penalties and interest.

The best money management remedy would be to join the grass roots movement to get Congress to get the FairTax Act passed. To find out more about what you can do to get involved and make that happen, visit www.fairtax.org today.

If you are in debt, claim your free copy of the Debt Reduction Solutions Guide here: http://www.thedebtreductionsolution.com/

If you have anything to say about taxes, leave a comment.

Sandra Simmons, President of Money Management Solutions (www.moneymgmtsolutions.com) specializes in helping business owners and individuals manage their money and do tax planning to achieve their financial goals.