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Tax Implications of Buying a House

tax implications of buying a house

Purchasing a home is an exciting milestone in life as it represents a significant investment. However, beyond the joy of becoming a homeowner, it’s crucial to understand the tax implications that come with this major financial commitment. In this blog post, we’ll explore the various tax considerations related to buying a home, providing you with valuable insights to help you navigate this aspect of homeownership confidently.  

Itemizing Deductions 

Purchasing a home may be the first opportunity you receive to start itemizing your deductions during tax time. While itemizing can require much more work, it could result in a larger refund. If you want to claim any expenses related to your home, you must itemize your deductions. This might include expenses such as mortgage interest or real estate taxes. Consulting with a knowledgeable tax professional can give you a better understanding of your best option is.

Mortgage Interest Deduction 

If you have a home loan that originated after December 16, 2017, you can deduct mortgage interest, up to $750,000. Any loan with an origination date before this qualifies for a mortgage interest deduction of up to $1 million. To qualify for this deduction, you must itemize your deductions on your tax return and meet certain eligibility criteria. Every January, your home lender should send you Form 1098, Mortgage Interest Statement. This reports mortgage interest of $600 or more you paid during the year. If you paid less than $600 in mortgage interest, you can still deduct it during tax time. 

In addition to mortgage interest, your 1098 will also show much you paid in mortgage points during the year. Mortgage points are a form of payment made to obtain your mortgage. They are generally defined as a percentage of your loan amount. For instance, let’s assume you paid three points, or 3%, on your $500,000 mortgage, for a total of $15,000 (3% of $500,000). The IRS will typically allow you to deduct the entire amount of your points in the year they were paid.  You should note that the deductible amount should be shown on your 1098 form. 

Real Estate Tax Deduction 

As a homeowner, one of your expenses will be real estate taxes. The IRS allows you to deduct only the actual real estate tax amounts paid during the year. However, you can also deduct local property taxes as well. If you pay these taxes through your lender, this amount should be shown on Form 1098. If you just purchased a home, you may have reimbursed the seller for their real estate tax payments. In this case, you will be able to deduct this amount through the real estate tax deduction too. Remember to keep records of any payments you made. Beginning in 2018, the total amount of state and local taxes you can deduct, including property taxes, is capped at $10,000 per year. 

Home Energy Credits 

Homeowners can also claim tax credits by making some energy efficient upgrades to their home. Specifically, the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit are great tax credits for those who recently made home improvements that help conserve energy. Some examples include energy-efficient windows, exterior doors, furnaces, air conditioners, solar panels, and more.  

Mortgage Interest Credit 

The IRS allows lower-income and moderate-income taxpayers to claim the Mortgage Interest Credit if they received a mortgage credit certificate (MCC) from their state or local government. An MCC is usually given to first-time homeowners, and it allows you to claim the credit of up to $2,000 of the mortgage interest paid per year. Taxpayers should note that this credit is completely separate from the mortgage interest deduction that uses Form 1098. The Mortgage Interest Credit can be claimed using Form 8396. 

Tax Help for Homeowners 

The tax benefits of homeownership can provide notable savings and financial advantages. By familiarizing yourself with the tax deductions and credits available, making informed decisions about how to file your taxes can be a little easier. However, navigating complex tax rules and regulations can be overwhelming. Therefore, it’s highly recommended to consult with a qualified tax professional who can provide specific guidance tailored to your individual situation. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.  

Contact Us Today for a Free Consultation 

Chapter 13 Bankruptcy and Taxes

chapter 13 bankruptcy and taxes

We are told that filing for bankruptcy should be the very last resort when dealing with extreme financial hardship. This is because it has long-term effects. For example, it will leave a negative impact on your credit score for up to 10 years. It will result in decreased access to credit, loss of assets, and sometimes forfeiture of tax refunds. In addition, bankruptcies are public information, so employers, customers, family, and just about anyone can access this information. Filing for bankruptcy must be a calculated decision and one that takes all factors into consideration, including the tax implications. In this blog article, we’ll look at the tax consequences of Chapter 13 bankruptcy and provide useful information to help individuals and companies make informed decisions. 

What is Chapter 13 bankruptcy? 

Chapter 13 bankruptcy is often known as the wage earner’s bankruptcy, including self-employed individuals and sole proprietors. This is because it is for those who have income but have fallen behind on payments for items purchased on credit. In Chapter 13 bankruptcy, your debts are reorganized, and a payment plan is established. A court-appointed trustee will supervise you and collect and distribute your payments. As long as you satisfy the terms of the repayment plan issued by the bankruptcy court, you should be allowed to keep your house after Chapter 13 bankruptcy. Under Chapter 13, you have 3-5 years to pay off your obligations while devoting all of your disposable income to debt repayment. That implies simple living. However, the Chapter 13 option allows you to erase unsecured debt, such as credit card bills, while catching up on home payments. 

What happens to tax debt after filing for Chapter 11 bankruptcy? 

Tax debts cannot usually be discharged (wiped away) in Chapter 13 bankruptcy. You instead repay your tax debts over the course of your Chapter 13 repayment plan. This could take three or five years. Typically, during bankruptcy, debts will be classified as priority or nonpriority. These tax debts need to be paid in full during the repayment period. This can include income taxes, FICA, some employment taxes, penalties, and others. On the other hand, nonpriority debts are usually combined with unsecured debts you have, such as credit card debt. These are the debts that are likely to be settled with creditors for less than what you owe. However, if you still have remaining taxes due when your repayment period ends, you must pay them in full. Any outstanding tax debts will not be discharged, and you will be obligated to pay them. 

Filing Tax Returns After Bankruptcy 

Like the other two chapters, it is imperative that you still pay your taxes while in Chapter 13. It is critical to keep up with your tax duties during your bankruptcy process, including timely filing of tax returns and payment of any taxes owed by the due date. While in bankruptcy, you can technically still receive tax refunds. However, they might be delayed or utilized to pay off tax debts. 

Tax Help for Bankruptcy Filers 

It can be difficult to pay taxes while in Chapter 13 bankruptcy. You may confront a variety of difficulties. Some examples are managing all payments, paying down interest and penalties on your tax debt, changing your repayment plan to incorporate tax liabilities if it hasn’t been done already. Taking care of both tax payments and overdue tax bills during Chapter 13 can be overwhelming, but it really is crucial to not only understand your tax obligations but also figure out how to manage your debt during your repayment plan. Rest assured, working with experienced bankruptcy lawyers and tax professionals can help mitigate the situation and help you successfully navigate the bankruptcy process. If you need tax help, Optima Tax Relief is here.  

Contact Us Today for a Free Consultation 

Chapter 11 Bankruptcy and Taxes

chapter 11 bankruptcy and taxes

Navigating the intricate world of bankruptcy can be difficult, particularly when it comes to comprehending the tax implications. Chapter 11 bankruptcy is a powerful instrument for reorganizing individuals and enterprises and regaining financial stability. However, it is critical to understand how this process impacts taxes and plan properly. In this blog article, we’ll look at the tax consequences of Chapter 11 bankruptcy and provide useful information to help individuals and companies make informed decisions. 

What is Chapter 11 bankruptcy? 

Also known as a “reorganization” bankruptcy, Chapter 11 bankruptcy is much more complicated than its counterparts. Chapter 11 bankruptcy is a type of bankruptcy in which you keep your financial assets and exempt property. Unlike Chapter 7 bankruptcy, you are the appointed trustee in this sort of bankruptcy case. Additionally, you can borrow new money. With Chapter 11 bankruptcy, some taxes can be discharged, but it varies per situation. Failure to properly reorganize and obtain approval for a debt repayment plan may result in the conversion of a Chapter 11 case to a Chapter 7. In this case, assets are liquidated to pay off debt. 

What happens to tax debt after filing for Chapter 11 bankruptcy? 

Chapter 11 bankruptcies typically do not discharge tax debt. In Chapter 11, pre-petition tax liabilities are categorized as “priority claims.” These claims must be paid in full, and tax officials are usually given priority over other creditors. However, there are circumstances where taxes can be considered a “dischargeable debt” that may be forgiven through bankruptcy. The amount of tax debt that can be erased is determined by a variety of factors, including the type of tax owed, the length of time the tax obligation has been outstanding, and the corporation’s or individual’s financial means.  

Filing Tax Returns After Bankruptcy 

Businesses must continue to file their tax returns as required by the IRS under Chapter 11 bankruptcy. Failure to meet these duties may result in penalties and audit risks. It’s critical to work with a skilled tax professional to ensure timely and accurate filing of tax returns, as noncompliance may stall the bankruptcy process and cause further legal issues. While in bankruptcy, you can still obtain tax refunds. However, refunds may be delayed or used to pay off tax debts. 

Tax Help for Bankruptcy Filers 

Throughout the bankruptcy process, it’s crucial that you remain compliant with the IRS, specifically with tax filing and reporting. Failure to file tax returns on time and correctly may result in penalties and other problems. Also keep in mind that if you do declare bankruptcy, you may have additional reporting requirements, such as alerting the IRS of your bankruptcy filing. Given the complexities and potential tax ramifications of bankruptcy, it is strongly advised to seek professional advice. Consulting with tax professionals as well as bankruptcy attorneys will provide you with the information you need to successfully navigate the process. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.  

If You Need Tax Help, Contact Us Today for a Free Consultation

Optima Newsletter – May 2023

What Happens If You Don’t File Your Taxes?

The April 18th tax deadline passed, and you did not file your tax return. Now what? First, don’t panic. Not everyone needs to file a tax return. Typically, if you earn less than the standard deduction associated with your filing status, you do not need to file a return. On the other hand, if you did not file a tax return even though you were required to, you might have an issue. Here’s what happens if you don’t file your taxes. 

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3 Things to Watch Out for After the Tax Deadline

Owing taxes is more expensive than ever before. Filing an accurate return on time is the best way to avoid penalties, interest, and IRS collections. CEO David King and Lead Tax Attorney Philip Hwang list three things to watch out for after the tax deadline.

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How to Report Foreign Income

The United States is currently one of the only countries in the world that taxes based on citizenship, and not residency. However, there are some exclusions and foreign tax credits that can reduce your tax liability. Needless to say, reporting foreign income can be tricky. Here’s an overview of how to report foreign income at tax time. 

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Top Risks of Owing the IRS

If you have an unpaid tax bill, you know the stress that comes with owing the IRS. The IRS is a powerful agency with the ability to collect what is owed to them using severe methods, like garnishing your wages or levying your bank accounts. With a 10-year statute of limitations, the agency has plenty of time to forcefully collect tax debts. Here are some of the top risks of owing the IRS.  

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Chapter 7 Bankruptcy and Taxes

chapter 7 bankruptcy and taxes

Bankruptcy is an exhausting process that individuals and corporations may have to go through when they are overburdened by financial obligations. While it provides the opportunity for a fresh start, it is critical to be mindful of the tax implications. In this blog article, we will discuss the tax implications of bankruptcy, assisting you in understanding the potential penalties and providing guidance to help you navigate this complex scenario. 

Taxes After Bankruptcy 

The discharge of debts is one of the key benefits of bankruptcy. It allows people or organizations to erase or restructure their financial commitments. It is important to note, however, that not all obligations, including certain tax debts, are immediately forgiven. Much of it will depend on which type of bankruptcy you file for. 

What is Chapter 7 bankruptcy? 

Chapter 7 bankruptcy is commonly known as “liquidation bankruptcy” or “straight bankruptcy.It’s a legal procedure that allows individuals or corporations to start over financially by erasing the majority of their debts. It is the most common type of personal bankruptcy in the United States. A trustee is appointed in Chapter 7 bankruptcy to oversee the proceedings and manage the debtor’s assets. The primary function of the trustee is to identify any non-exempt assets that can be sold or liquidated to repay creditors. 

What happens to tax debt after filing for Chapter 7 bankruptcy? 

Income taxes can be discharged by filing Chapter 7 bankruptcy if you meet certain requirements including: 

  • Your tax debt is income based (either federal or state) 
  • You did not intentionally evade making tax payments and all actions were lawful 
  • Your tax debt is at least 3 years old 
  • You filed a tax return at least 2 years before filing for bankruptcy. Late returns and substitute returns filed by the IRS generally do not count.
  • The taxes in question were assessed at least 240 days before filing for bankruptcy 

You must note that any tax liens recorded before the bankruptcy will remain in effect. You will still need to pay off the tax lien when you sell the property with the lien attached to it. 

In addition, property taxes owed before the bankruptcy is filed will still be owed. Taxes other than federal and state will also still be due, including FICA, Medicare, sales tax, etc. You should also expect to continue paying certain employment taxes and penalties.  

Filing Tax Returns After Bankruptcy 

When filing, you will use Form 1040 for your individual return and your appointed trustee will file Form 1041 on your behalf, which is the U.S. Income Tax Return for Estates and Trusts. You may receive Form 1099-C, Cancellation of Debt from creditors that canceled $600 or more in debt on your behalf. Typically, any canceled debt should be reported on your tax return as taxable income. However, having debt forgiven through bankruptcy typically exempts an individual from paying taxes on the canceled debt. When your debt is discharged through bankruptcy, you’ll need to file IRS Form 982, About Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness to inform the IRS of your discharged debt that should be excluded from your taxable income. 

Tax Help for Bankruptcy Filers 

Compliance with tax return filing and reporting duties is critical throughout bankruptcy. Failure to file tax returns on time and appropriately might result in penalties and further issues. Furthermore, if you file for bankruptcy, you may have extra reporting duties, such as notifying the IRS of your bankruptcy filing. Given the intricacy and potential tax implications of bankruptcy, it is strongly advised to obtain expert guidance. Consulting with both tax professionals and bankruptcy attorneys will give you the knowledge you need to successfully navigate the process. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.  

Contact Us Today for a Free Consultation