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  Finance | Financial advice | Immigration | Special Needs | Accounting | Business | Labor Law | Asset Protection

Francis Vayalumkal

While getting a lender to agree to a short sale may seem like an answer to the prayers of homeowners who want to unload a house, it's not a good move if you're merely looking to find a new place. It's generally a last-ditch effort when the only other option is foreclosure.

Should you go for a short sale? It depends on how deep a financial hole you're in and how likely it is you'll be able to overcome those financial difficulties. If the only options are foreclosure or short sale, generally a short sale is going to be a better idea.

Be ready to document your need and to show the lender you are serious about your situation, including a hardship letter (an honest explanation of your financial situation and how it occurred), pay stubs, bank statements, tax returns, an appraisal and documentation of your debts.

If you're considering a short sale, experts advise you to take the following steps to meet potential negative consequences head-on.

1. Get it in writing. Make sure the lender agrees in writing that the short sale will absolve all debts.

2. Protect your credit rating. Ask the lender how it will report the short sale on your credit report. Most of the time, a short sale shows simply that a debt is satisfied, but theoretically, a short sale could reflect on the credit report as 'settled for less than the full balance. Such a designation is a negative mark on your credit report, though it wouldn't hurt your credit as much as a foreclosure would.

3. Get professional tax advice. Short sales often have tax repercussions since lenders can claim the forgiven debt as income that they provided you. That means if you agreed to a short sale for $50,000 less than what you owed the lender, the lender could issue you a 1099 for $50,000, which you would have to pay taxes on. But there are two "outs," If you meet the IRS' definition of insolvency at the time the debt was forgiven; you generally don't have to pay taxes on it.

Or, if your home loan is a nonrecourse loan, you're also likely to escape this tax. With a recourse loan, whoever signed the note is personally liable for the debt, and in a short sale, the debtor would have to pay tax on the difference. A nonrecourse debt is one secured by the loan collateral -- such as the house itself -- and the debtor would not have to pay tax on the sale shortfall.

The most common case is that mortgages secured by the property -- especially for buyers who made a 20 percent or more down payment -- is a nonrecourse loan. But it is absolutely critical you consult a tax attorney before you make such a move to ensure that you don't dig a deeper financial hole as a result of the tax situation.

In this market, there are so many people who are on both sides of a short sale. Investors who can afford to buy and hold on to properties for a while and people who have to unfortunately do a short sale. Both sides should consult experts in the industry before proceeding.

Francis Vayalumkal is a mortgage banker with Regions Bank and can be reached at (813) 719-0303

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Nitesh Patel

Take a minute to fast-forward to your retirement and envision your own American Dream. If you’re like most Americans, your dream entails a financially comfortable “worry-free” retreat with an abundance of free-time and available assets to spend on things you really love doing.

Now, rewind back to today. What specific action steps are you taking now to attain your retirement goals? How much money have you saved – and how much should you save in the future to support a worry-free retirement?

If you struggled answering these questions, your financial behavior – or lack of action – may be sabotaging your retirement plans.

An ongoing study of America’s financial behaviors, Money Maladies, highlights the fact that most Americans come up short when it comes to their knowledge of financial matters and a strategy to achieve their financial goals. The 2006 study, commissioned by Northwestern Mutual, asked a cross-section of Americans about their financial dreams and goals, and examined whether they were taking necessary actions to achieve them. The study found a well-defined chasm between respondents’ goals and behaviors – a disconnect that most don’t even realize. (Northwestern Mutual, Money Maladies Financial Matters Study, March 2006)

For example, the study found that, in general, most respondents anticipate retiring at age 62. However, the actions taken by most people aren’t conducive with those expectations: According to the study, only 6 in 10 have an employer-sponsored retirement account such as a 401(k) or 403(b). And, while a large majority have a savings account, fewer than half own an IRA, stocks or mutual funds. (Northwestern Mutual, Money Maladies Financial Matters Study, March 2006)

Americans also are missing the boat on saving for college education. Half have children they would like to send to college and most expect to pay for at least some of that cost; but only a small share have a goal of how much they would like to save. While most estimate college will cost about $100,000, the majority have saved less than $20,000. (Northwestern Mutual, Money Maladies Financial Matters Study, March 2006)

Another study by the Employee Benefit Research Institute (EBRI) in 2006 underscores the finding that Americans have a false sense of security about being prepared for retirement and underestimate how much money they’ll actually need. (Employee Benefit Research Institute (EBRI), “Annual Retirement Confidence Survey,” April 2006) The EBRI study found that two-thirds of workers say they’re confident they’ll have enough money for retirement, despite the following eye-opening realities:

More than two-thirds of workers – and more than half of those 55 or older – have less than $50,000 saved for retirement.

Seventy percent of workers say they or their spouses have saved for retirement, though only 64 percent are actually saving.

Only 42 percent of workers say they or their spouses have taken time to calculate their financial needs during retirement.

Behavior modification

Clearly, Americans need to put their money where their mouths are when it comes to preparing for retirement. The key is aligning financial behavior with goals and aspirations. Here are a few ideas to get your financial behavior in order:

Set realistic goals and crunch the numbers. Start by figuring out how much money you’ll need in retirement. Experts generally estimate that most need 70-80 percent of their pre-retirement income. Be honest about how you want to live in retirement and how much it will cost. Then calculate how much you must save to supplement Social Security and other sources of retirement income. Use Web sites, such as the Learning Center at, to utilize financial calculators and help the process.

Create your strategy. Having a financial strategy in place – complete with objectives and action steps – will help put your future into clear focus. You might consider working with a qualified financial professional to help you put together a strategy to achieve your individual goals.

Build your knowledge. The more you know about spending, saving and investing, the farther your knowledge will take you in attaining your aspirations. Take time to read financial publications, such as The Wall Street Journal, attend seminars, and research online resources to build your financial knowledge. Incidentally, the 2006 Money Maladies study showed that the majority failed to correctly answer 60 percent of the study’s questions pertaining to financial knowledge. (Northwestern Mutual, Money Maladies Financial Matters Study, March 2006) It may be eye-opening to gauge your own financial knowledge and see how you match up by taking the same test at

Use the power of investing. The sooner you begin saving, the more time your money has to grow. Gains build yearly thanks to compounding – a good strategy for accumulating wealth. Also, contributing money to retirement accounts, such as a 401(k) gives you an immediate tax deduction, tax-deferred growth on your savings, and often a matching contribution from your company.

While there’s no rule of thumb when it comes to securing a financially comfortable retirement, there is one common thread for everyone to follow: Taking action now will help keep your financial goals on track and make a positive difference in your financial future.

Nitesh Patel is a financial representative with the Northwestern Mutual Financial Network based in Clearwater for The Northwestern Mutual Life Insurance Company, Milwaukee, Wisconsin). To reach Patel, call (727) 799-3007 or e-mail

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Kamlesh Patel
CRUNCHING ‘EM NUMBERS: last minute 2007 legislation provides taxpayer relief


In the final hours before adjourning for 2007, Congress passed the Tax Increase Prevention Act of 2007, providing a “patch” to the alternative minimum tax (AMT) that will keep millions of taxpayers from being hit by the AMT. President Bush signed the bill into law on Dec. 26, 2007.

The AMT relief is for one year only — 2007. The law increases the 2007 AMT exemption amount to $66,250 for joint filers, to $33,125 for couples filing separately, and to $44,350 for single taxpayers and heads of household. In addition, the law will allow most nonrefundable personal tax credits (such as education credits and the dependent care credit) to offset AMT liability.

Congress had been under considerable pressure to pass legislation to patch the AMT. Without action, an estimated 25 million taxpayers could have seen their 2007 tax bill increase by an average of $2,000. The AMT issue will be on the Congressional agenda again this year. Congress must decide whether to give this tax, originally created to apply only to wealthy taxpayers, another short-term “patch” or a permanent fix.

Also passed late in 2007 was the Mortgage Forgiveness Debt Relief Act. This law provides relief to taxpayers struggling with home foreclosures and mortgage refinancings.

Prior to this law, the forgiveness of mortgage debt by a lender generally resulted in taxable income to the taxpayer. The new law allows homeowners to exclude up to $2 million of certain forgiven mortgage debt from federal taxable income. The exclusion is available for 2007, 2008 and 2009 and applies to foreclosures and renegotiations of qualified mortgages on primary residences. The amount of debt forgiven reduces the basis in the home.

The Mortgage Forgiveness Debt Relief Act also extended the itemized deduction for qualified mortgage insurance premiums through 2010. Another provision in the law extends the time a widowed spouse can claim the $500,000 home sale gain exclusion available to couples.

use the “saver’s credit” to cut your 2007 tax bill

Would you like to shave $1,000 off your income tax bill? Would your spouse like to join in the tax savings of up to $2,000 on a joint return? This potential savings comes in the form of a tax credit called the “retirement savings contributions credit” or “saver’s credit.” Unlike a tax deduction, a tax credit is a dollar for dollar reduction of the taxes you owe.

How do you qualify for this credit? By contributing to a retirement plan, you could be eligible for the saver’s credit. This includes contributions to both Roth and traditional IRAs. It also includes salary deferrals into SEP, SIMPLE, 401(k), 403(b) and 457 plans.

How much is the credit? The credit ranges from 10 to 50 percent of the first $2,000 contributed to a retirement plan. In other words, the maximum credit is $1,000 for an individual. If you and your spouse both contribute at least $2,000 to your retirement accounts, you could qualify for up to a $2,000 credit on a joint return.

Are there limitations? Like many tax breaks, this credit decreases or phases out entirely once your income reaches certain levels. The 2007 income phase-out range is $15,500 to $26,000 for individuals, $23,250 to $39,000 for heads of household, and $31,000 to $52,000 for married couples filing a joint return. (Income limits are adjusted annually for inflation.) In addition, you cannot take the credit if you are under age 18, a full-time student or someone else’s dependent.

Here’s an example. Say you put $3,000 into an IRA and you qualify for the maximum $1,000 saver’s credit. You can deduct your $3,000 contribution for a tax savings of $450 ($3,000 x 15% tax rate). Add this $450 tax savings to the $1,000 saver’s credit, and your total tax savings equals $1,450. That’s the equivalent of earning 48 percent on your $3,000 investment in one year.

If you haven’t been contributing to a retirement plan, this tax credit adds yet another incentive to do so. You have until April 15, 2008, to make a 2007 IRA contribution that could reduce your 2007 taxes.

a gift should include tax information

Imagine this scenario. Your wealthy Uncle John is something of an art collector, buying paintings and sculptures from promising young artists. When he retires, he moves into a small condo in a retirement community and has to downsize his art collection. He gives away much of his art to family members, and you receive an abstract painting. He tells you that he paid $5,000 for it only two years ago.

A few years later, Uncle John passes away, and soon after that you decide to sell the painting. You’re delighted when an art dealer offers you $12,000 for the painting. Unfortunately, the IRS audits your tax return for that year and informs you that you owe capital gains tax on the sale.

How much do you owe? In theory, you received Uncle John’s cost basis in the picture when you received it as a gift. Your taxable gain would be $7,000 ($12,000 sales price minus his $5,000 cost basis). But unless you can document Uncle John’s purchase price, the IRS might well claim that you owe tax on a $12,000 gain.

When you sell property you received as a gift, the general rule is that your basis is the donor’s cost basis. If you sell at a loss, your basis is the lower of the donor’s basis or the fair market value on the date you received the gift. There are adjustments to these numbers in some cases. But the important point is that without cost records, you have no way of proving the donor’s basis and no way of disputing an IRS claim.

While it might seem embarrassing to ask for records of the cost when you receive a gift, it could save you a significant amount of taxes in the future. And if you have received valuable gifts in recent years, it might be worth going back to recover the cost records before they’re lost forever. On the other hand, if you’re the one making the gift, give the cost records at the same time. If you don’t, you may end up giving a gift to the IRS in the form of unnecessary taxes.

Kamlesh H. Patel, CPA, can be reached at (813) 949-8889 or e-mail or

Finance | Financial advice | Immigration | Special Needs | Accounting | Business | Labor Law | Asset Protection

Satya Shaw

A successful retirement does not just happen; you have got to plan for it. The long ramp toward retirement focuses on saving and investing, but once retirement starts emphasis shifts to spending and safeguarding. Even though the greatest challenge in retirement, and probably your greatest fear, is outliving your money, most people spend less time planning their retirement than they do planning a vacation.

What does retirement planning involve? Here are the steps: First, determine what you would ideally like to do in retirement, and then discuss it with your spouse and other loved ones. Will you spend your time traveling, enjoying hobbies, helping others, working part time, or what? Second, estimate the retirement income you'll have from savings, Social Security, pension and all other sources. Third, estimate your expenses making sure to take account of inflation, taxes and health care costs, which are likely to be an increasing part of your budget.

Steps two and three should be done for each five-year period of your retirement and then revised annually. Fourth, if you have more income than needed, you only need to safeguard your investments to make sure they're not lost or shrunk by bad decisions. If you have insufficient money for retirement (expenses exceed income), then you'll need to postpone retirement, work part-time or possibly use a Reverse Mortgage to access the equity in your home. Either way, it is highly recommended that you minimize your exposure to loss and maximize the full potential of your financial resources by working with a financial adviser. They can help you determine the risk you can afford, investment options and how to position your money for best results without sacrificing safety. Retirement is going to be long, filled with uncertainties, including emergencies, and going it alone is one of the greatest risks you can take.

Be realistic in your planning. For example, be aware that for a couple age 65, there is a 50 percent probability that one will live beyond age 90. Acknowledge that even a low rate of inflation can make a big difference in prices over the 20 to 30 years you'll be in retirement. For example, average inflation of 3 percent means $1 today will be worth only 55 cents in 20 years and 41 cents in 30 years. Since 78 million boomers are entering retirement over the next two decades, the price of everything related to retirement, especially health care, is likely to rise faster than overall inflation. Inflation is a cruel tax for those on fixed incomes, and chances are your income in retirement will increase a lot slower than prices.

The boomer explosion is going to overwhelm government-provided services and benefits. This means that the relative benefits of Social Security and Medicare are going to shrink under the pressure of increased retirees. There will simply be more people receiving entitlement benefits than workers paying the bills. Every study, government and private, indicates there will be a shortage of money to support these programs. To pay for this shortfall, the government must raise taxes of all types. The increased taxes, inflation, relative decrease of benefits combined with escalating medical care costs will be especially burdensome for those in retirement without rising incomes from wages and salaries.

If you haven't evaluated it yet, investigate the risk you're taking with your retirement money. Would you have a loss if the stock market lost ground? You might if your money is still in your ex-employers 401(k) plan, or if you own securities, even mutual funds, whose value is determined by the market. Generally, investments in stock have done well long term, but you may need your money before a long time. From November 1973 to October 1974, the S&P stock market index fell 48 percent, and it took over six years to recover. The last bust in the stock market was 2000-2002, and we have yet to fully recover. In the meantime, inflation marches forward with the shrinking dollar purchasing less. Much of your income in retirement is likely to be derived from your savings and investments, and you simply can not afford risk of loss and the compounding of inflation. If you lose some or all of your retirement money to bad investments, you'll increase dramatically your chances of realizing your greatest fear: outliving your money.

How do you safeguard against the challenge of too many years and not enough money? Like law and medicine, financial planning is best left to professionals. Your job in retirement is to enjoy life free of investment worries.

Satya B. Shaw, CPA, can be reached at (813) 842-0345.

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