Tax 2007: New Benefits for Homeowners

Foreclosure Benefit: Before 2007, taxpayers often owed income tax on the value of their home loan after that loan was cancelled through a foreclosure proceeding, otherwise known as "cancellation of indebtedness income." But now homeowners who went through foreclosure in 2007 have Congress to thank for the Mortgage Forgiveness Debt Relief Act of 2007. So, for 2007 tax return, if you had cancellation of indebtedness income on your principal residence (Note: Not investment property), the first $2 million goes income-tax free. For more details, visit IRS webpage on this topic.

Mortgage Insurance Benefit: If you purchased mortgage insurance contract for a home loan in 2007, you may be able to deduct your premiums. You must itemize to take this perk. If you qualify, the value of your insurance premiums is treated as deductible mortgage interest. The benefit starts phasing out if adjusted gross income exceeds $100,000. For more details, visit IRS webpage on this topic.

Tax 2007: Stricter Charity Donation Rule

While filing your year 2007 tax return, you need to be careful about a new twist in the clause for charity donations.

In previous years, charitable givers didn't need receipts for cash donations under $250, while claiming a deduction for such donations. For 2007 tax return, however, you need substantiation for any amount that you give. Unless you possess a receipt, you can no longer take a deduction for those contributions.

A cancelled check or bank record, or a receipt from the charity will do, as long as the name of the organization, the date and amount of the donation are noted. Taxpayers don't need to file those receipts with their return, but they need to have them on hand in case the IRS decides to have an audit on your return.

Also, note that the IRS now requires any donated clothing or household items donated to be in "good" or better condition to qualify as deductible. If the IRS questions your claim, you'll need to prove the condition and the value of your donation. You may consider photographing your items before donating them, and keep all receipts.

Also, keep in mind another new rule introduced in 2006 that still applies: If you claim donated property worth in excess of $5,000, you need a qualified appraisal.

Related webpages:
IRS publications on charitable donations
IRS publication on Qualified Appraisal

Tax 2006: In Case You Can't

Your 2006 taxes are due by midnight of Tuesday, April 17, 2006. In case you are not prepared to submit yet, here are some useful information:

Individual Extension: You can now use Form 4868 to obtain a single automatic 6-month extension -- until October 15th. Perhaps you are aware that the Form 2688, which was meant for getting a second extension, was eliminated after 2005. By filing for an extension you will avoid the late filing penalty (5% per month with a maximum of 25%), but you will still be subject to interest and late payment penalty in case you owe any taxes.

Business Extension: Starting January 1, 2006, all eligible business taxpayers can use form 7004 to request an automatic 6-month extension to file returns. In prior years, non-corporate business taxpayers had to request an initial 3-month extension, and then another 3-month extension, if needed.

It's better to make a good estimate of how much you'll owe to IRS for your 2006 tax and send a check with your extension form if you file by mail, or authorise the I.R.S. to automatically withdraw the amount from your bank account on April 17 if you file electronically.

If, however, you owe nothing, or much better, Uncle Sam owes you, there is no penalty. You do not have to apply for extension. File as soon as you can depending on how fast you wish to get back your money from Uncle Sam.

Here is the link to all kinds of Forms and Instructions from IRS website.