Can I include this year's deductions next year?

A client asked if he could add mortgage information that he could not find this year to next year’s income tax. The answer is “no.” If you are on the cash method, the law requires that all deductions must be included in the year that the deduction was incurred. Most individual taxpayers are on the cash method of accounting.

Most individual tax returns cover a calendar year—the 12 months from January 1 through December 31. If you do not use a calendar year, your accounting period is a fiscal year. You choose your accounting period (tax year) when you file your first income tax return. It cannot be longer than 12 months.

You also choose an accounting method when you first file your return. Your accounting method is the way you account for your income and expenses. Most individual taxpayers use the cash method. If you want to change your accounting method after that, you generally must get IRS approval.

Using the cash method means that you report all items of income in the year in which you actually or constructively receive them. Generally, you deduct all expenses in the year you actually pay them.

If you cannot find your information before the final deadline of October 15, submit your current year tax return before then and amend the return later when the information is found.

Foreclosure Tax Relief Available to Many

Special Web Section Unveiled for Homeowners Who Lose Homes; Foreclosure Tax Relief Available to Many

WASHINGTON — The Internal Revenue Service unveiled a special new section today on IRS.gov for people who have lost their homes due to foreclosure. The IRS also reassured homeowners that, although mortgage workouts and foreclosures can have tax consequences, special relief provisions can often reduce or eliminate the tax bite for financially strapped borrowers who lose their homes.

The new section of IRS.gov includes a variety of information, including a worksheet designed to help borrowers determine whether any of the foreclosure-related relief provisions apply to them. For those taxpayers who find they owe additional tax, it also includes a form they can use to request a payment agreement with the IRS. In some cases, eligible taxpayers may qualify to settle their tax debt for less than the full amount due using an offer-in-compromise.

The IRS urges struggling homeowners to consider their options carefully before giving up their homes through foreclosure.

Under the tax law, if the debt wiped out through foreclosure exceeds the value of the property, the difference is normally taxable income. But a special rule allows insolvent borrowers to offset that income to the extent their liabilities exceed their assets.

The IRS cautions that under the law, relief may be limited or unavailable in some situations where, for example, part or all of a home was ever used for business or rented out.

Borrowers whose debt is reduced or eliminated receive a year-end statement (Form 1099-C) from their lender. By law, this form must show the amount of debt forgiven and the fair market value of property given up through foreclosure. Though the winning bid at a foreclosure auction is normally a property’s fair market value, it may not necessarily reflect its true value in some cases.

The IRS urges borrowers to check the Form 1099-C carefully. They should notify the lender immediately if any of the information shown on their form is incorrect. Borrowers should pay particular attention to the amount of debt forgiven (Box 2) and the value listed for their home (Box 7).

The IRS also reminds lenders of their obligation to provide accurate information on the Form 1099-C. By law, the lender must send a copy of this form to the IRS. IRS follow-up contacts with taxpayers involved in foreclosure are based largely on the information reported on this form, and whether it conflicts with information provided by the taxpayer on their federal income tax return.

The IRS normally initiates these follow-up contacts by sending the borrower a notice. The tax agency urges borrowers with questions to call the phone number shown on the notice. The IRS also urges borrowers who wind up owing additional tax and are unable to pay it in full to use the installment agreement form, normally included with the notice, to request a payment agreement with the agency.

Related Item: Questions and Answers on Home Foreclosure and Debt Cancellation

Back-to-School Tax Breaks

With the new school year now under way, the Internal Revenue Service today reminded teachers, parents and students that saving receipts and keeping good records can help them take advantage of various education-related deductions and credits on their 2007 federal income tax return.

Available tax deductions:

• The educator expense deduction
• The tuition and fees deduction
• The Hope credit
• The lifetime learning credit

Keep your receipts.

Related Links:
More about back-to-school tax breaks
IRS Publication 970, Tax Benefits for Education

GAO Says 6 in 10 Sole Proprietors Underreport Income

The IRS and other government agencies are searching for ways to reduce the GAP. Gap is defined as the difference between what taxpayers actually paid and what they should have paid on a timely basis.

According to a new GAO report an estimated 6 out of 10 sole proprietors underreport their income, but just a handful of them account for the bulk of lost tax revenue attributable to that group.

Look for the IRS to use this study to support their position in increasing audits of sole proprietors and other small businesses. The audits generally go back three years. If you own a small business, make sure that you can substantiate your income for years 2004, 2005 and 2006.

The GAO Repot A Strategy for Reducing the Gap Should Include Options for Addressing Sole Proprietor Noncompliance

Getting Health Treatment Overseas

Soaring health costs are driving Americans out of the country to get medical treatment. Many of these foreign countries have state-of-the-art medical facilities, but certain risks exist in many countries. Below are ways AARP suggests to conquer those risks:

1. Research, research, research. Read articles, do internet searches and talk to people who’ve been treated abroad. Examine the credentials, licensing and success rates of prospective doctors. Check hospital accreditations and how many relevant procedures they perform annually. Confirm prices. If you’re having an implant, check the device’s safety record.
2. Consider working with a health travel agency that can find you quality medical sources and coordinate a trip. Keep in mind that such agencies aren’t regulated as health care professionals, and they may receive fees from participating hospitals.
3. Enlist the advice and support of your doctors at home.
4. Gather medical records you’ll need—drug lists, test results, etc.—and find out what records you’ll need to bring back home.
5. Travel with an “advocate”—a spouse or close friend.
6. If you’re insured, check to see if your overseas treatment will be covered.
7. Contact (by phone, email or mail) the hospital where you intend to seek treatment, interview your prospective doctor—make sure that you communicate easily with him or her.
8. Find a destination where you’ll feel comfortable being treated and recuperating, Local culture affects everything from food to bedside manner o hospital management

While saving money is the biggest reason for being treated abroad, saving time may be just as important. If you are a busy person who needs to be treated right away, going overseas might be your answer. But do your homework.

Articles about medical tourism:

Medical tourism on the rise
Survey Report: Doctors Say 'Bon Voyage' for Treatment Overseas

Always Send Me Your IRS Notices

It is a good idea to let me review your IRS Notices. You may not owe what the IRS says. Below is a good example:

One client recently gave me his notice saying that he owes $300. His original tax return showed an amount due of $422. He discovered that he had forgotten to give me the student loan interest statement of over $1,000. This reduced the amount due on his taxes to $122.

The client sent the $122 but failed to send in the amended return, which cannot be efiled. After receiving the notice and discovering the error, he sent in the amended return and all is well with the IRS. He almost sent the $300 without checking.

$300 saved is $300 earned.