2007 Roth IRA coming to a close

Technically, you can still contribute to your 2007 Roth up until April of 2008. The limit for young middle-income folks like myself is $4,000. Unless you make 6 figures, you need not worry about whether or not you can contribute (or whether your maximum contribution limit is lower). More details can be found here.

If you're like me, however, your 2007 budget ends on December 31, and savings afterwards falls into the 2008 contribution. With little more than 2 months left in the year, it's a good time to evaluate your progress and see if you have reached your maximum or exceeded it (yikes, more paperwork!). If you have exceeded it, be sure not only to withdraw the excess dollar amount but also the dollar amount of the interest that your excess earned. The tax you pay will be more than your earnings! There is no penalty for withdrawing excess contributions. Of course, hold on to it and just figure it in to your 2008 contribution.

A quick glance to my investment spreadsheet tells me that I am in no danger of exceeding my limit. Hopefully next year I can increase my monthly Roth allowance.

The county tax office is in a sound proof cave

Home values are down. Many houses in my street are for sale, others for rent, and many are bank owned. They aren't selling well and prices are being slashed. Property values are just plummeting. The house down the street from me has gone up for sale 3 times this year. Another one has been sitting on the market for almost 2 years. This year and the next will be a low point in the value of my home, assuming it doesn't get worse.

But why worry about that when you can just ignore it? The county tax office has. My house has continually gone up in value in the middle of a housing crash. Whodathunkit. Its no wonder people are disputing their appraisals in record numbers. Also amusing, they have issued statements claiming a tax cut. Oh, our actual taxes in dollar amount has increased incredibly, but the tax rate has been slashed a meager .2%, and they think we're so stupid that we'll thank them for it. Yes, that sure will offset my 10% appraisal increase and ridiculously over-valued rate.

Disputing your tax appraisal is much the same in every state. You go in front of a panel of government officials, bring as much evidence as you can to prove what you feel is the real value of your property, and then try to make your case. In a few weeks you get a letter with your new (or old) appraised value. From what I hear from others who have done it, they usually lower your appraisal a tiny amount just to appease you and hope you won't appeal.

Of course unless you are a reasonably good public speaker, the whole procedure is pretty darn intimidating. I'm sure it's supposed to be.

Food Stamps to buy junk?

I was in the store behind a woman in line with 2 kids. What I saw made me search out more information about food stamps, food stamp fraud, and shopping behavior. This family bought a couple gallons of milk with food stamps. It took quite a while, because not only did they have to fill out their little ticket and run it like a check through the machine, they had to run it as a separate transaction. You see, I don't think the government would be happy knowing they gave food stamps to this family if they knew what else they were buying.

When I sought out program requirements, I had to ask myself whether or not this particular family looked like someone who would qualify. Assuming she was married, she must have a household income of less than $1,613. The woman in front of me wearing nice clothes, sipping a Starbucks-whatever, and talking on a brand new Treo/Blackberry-type cellphone certainly didn't look like she was insolvent.

I suspect I had witnessed Food Stamp fraud.

Here's a little excerpt from a food stamp program:

Food stamp benefits...can be used in supermarket checkout lines only for the purchase of food.

What I witnessed instead was the food stamps, instead of buying food for hungry people, simply subsidized their other frivolous purchases. This family's cart (run up separately) also contained: a DVD player, several new DVDs, a case of Cola Cola, a case of beer, a few kid's toys, a cordless home telephone, and a bunch of other miscellaneous items that I didn't see.

Food stamps make it possible for such working poor families to stretch their income.

Yes it does. It is giving them free milk so they can buy $200 worth of frivolous junk. Our tax dollars hard at work.

The Gift Tax explained

Many people may be confused about what the IRS' gift tax really is. I myself was pretty confused about it. The common misconception is that every year if you give a substantial gift, you have to pay taxes on it if you give over a certain amount (excluding certified charitable organizations). You can certainly get that impression when you read the IRS gift tax summary, specifically:

If you gave any one person gifts in 2006 that valued at more than $12,000, you must report the total gifts to the Internal Revenue Service and may have to pay tax on the gifts.

Of course for most people we really don't pay any taxes at all. All individuals (even married people filing jointly count as two individuals) have an annual and lifetime limit on the amount of the gifts they can give without tax. As of 2006 the annual limit is $12,000. However only yearly amounts above that could you be possibly taxed on. If you gave $13,000 you are only liable for $1,000, but you still don't have to pay taxes on it yet.

Here are the details of the annual exclusion from IRS publication 950:

A separate annual exclusion applies to each person to whom you make a gift. For 2006, the annual exclusion is $12,000. Therefore, you generally can give up to $12,000 each to any number of people in 2006 and none of the gifts will be taxable.

However, gifts of future interests cannot be excluded under the annual exclusion provisions. A gift of a future interest is a gift that is limited so that its use, possession, or enjoyment will begin at some point in the future.

If you are married, both you and your spouse can separately give up to $12,000 to the same person in 2006 without making a taxable gift.

So the limit applies to gifts given from one individual to another. You can give ALL your money away in $12,000 increments to as many people as you want for the rest of your life and not pay a single dime in gift taxes.

If you are married, you can combine your excluded annual amounts:

In 2006, gift splitting allows married couples to give up to $24,000 to a person without making a taxable gift.

For individuals, even if you are filing a return for a gift tax you do not owe any tax until you reach the lifetime exclusion amount, which is $1,000,000. That's $1,000,000 for each person you give to. To reach that limit, I would have to be giving you a heck of a lot of money. I'd need to "gift" to you $32,000 for the next 50 years in today's dollars not adjusting for inflation (and the gift tax exclusions do adjust for inflation) before I would have to pay any taxes on the money I gave to you.

I think that amount of gift giving is out of the range of most middle class Americans. For the majority of us, the gift tax just doesn't apply. In other words, don't sweat over it.

Paying taxes on forgiven debt

Free Money Finance recently had a post regarding paying taxes after your house is foreclosed on.

This is true, any debt you are forgiven is subject to taxation as regular income. There are several exclusions however, so one may apply to you to remove you of such an obligation. As one FMF commenter pointed out, you are excluded if you are insolvent.

To read all the rules of this exclusion, refer to IRS Publication 908. The relevant excerpt follows:

Insolvency exclusion. You are insolvent when, and to the extent, your liabilities exceed the fair market value of your assets. Determine your liabilities and the fair market value of your assets immediately before the cancellation of your debt to determine whether or not you are insolvent and the amount by which you are insolvent.

Exclude from your gross income debt canceled when you are insolvent, but only up to the amount by which you are insolvent. However, you must use the amount excluded to reduce certain tax attributes, as explained later under Reduction of Tax Attributes.

Example.

$4000 of the Simpson Corporation's liabilities are cancelled outside bankruptcy. Immediately before the cancellation, the Simpson Corporation's liabilities totaled $21,000 and the fair market value of its assets was $17,500. Because its liabilities were more than its assets, it was insolvent. The amount of the insolvency was $3,500 ($21,000 — $17,500).

The corporation may exclude only $3,500 of the $4,000 debt cancellation from income because that is the amount by which it was insolvent. It must also reduce certain tax attributes by the $3,500 of excluded income. The remaining $500 of canceled debt must be included in income.

More general information about canceled debts can be found in IRS Publication 17, specifically:

Generally, if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income. You have no income from the canceled debt if it is intended as a gift to you. A debt includes any indebtedness for which you are liable or which attaches to property you hold.

Thus, you are taxed on it. It could also push you into a higher tax bracket, so you will end up paying more taxes overall for that year as well.

And foreclosures? Yep, they are included:

If your financial institution offers a discount for the early payment of your mortgage loan, the amount of the discount is canceled debt. You must include the canceled amount in your income.

There is some good news however. If you decide to repay your debts in full within 3 years, you can get a refund from the IRS. There are other exclusions as well, so if you are faced with this situation I recommend you read the entire section and 908.

Of course, you could always try to get your bank to report the forgiven debt as a gift.

Here's an article written in non-IRS speak: Lose Home, Pay More Tax