Professional Tax Advisers and Acceptable Opinions; Underwater Homes and Mortgage Relief

Advice is worth the price you for it. Free advice can sometimes actually be very valuable, depending on the source, but doing sufficient authoritative research to verify the facts is always worth the time and effort required.

We recently had an off-air phone conversation, about cashing out a Roth IRA account, with a listener of our weekly radio and web broadcast on KDOW 1220 AMWealth Management and You with Connie Yi.

The caller insisted that she did not need to report the transaction to the IRS, because she heard Suze Orman say on TV that you do not need to pay taxes when you cash out that type of retirement account.

Every Financial Situation Is Different

Not being a certified financial planner or an expert on Roth IRA accounts, we did not dispute the point. However, we do know that sometimes people only hear what they want to hear and they do not always obtain or understand all of the facts related to their own financial transactions.

As far as we know, taxes must be paid on all earnings at some point. The only legal variable is the tax rate that applies when the liability becomes due.

Earning declarations delayed until retirement via IRA accounts are usually taxed at a lower rate, because your income is much less at that stage of life than during your prime earning years.

Each of the various types of IRAs have very specific requirements associated with them, (and different penalties for violating those rules), so naturally it is important to know the IRS facts about Roth accounts and the other types of retirement arrangements – before you open an account and commit to a specific long-term financial investment program.

Every person’s financial situation is different, so no piece of financial advice can apply in every instance, regardless of the qualifications or success of the adviser. Tax laws are applied uniformly, but each person’s annual tax liability is determined by the calculation of their unique financial factors and withholding status for that year.

Advice is only good if you follow all of it and you support it with your own research to verify it – and maybe learn even more that will help you make better decisions.

Get It In Writing

One piece of advice we are willing to give is that when you base your decisions on how much tax to pay on the advice of a professional, you should obtain it in writing, so you can submit the written advice as evidence of your intent, if you are audited by the IRS later on.

If the IRS determines during an audit that you owe additional taxes for a previous year, you will have to pay that amount. However, if you relied on a written professional tax opinion to calculate your taxes and it caused you to underpay, the responsibility for that advice is on the adviser, who will then be liable for any penalty assessed on top of the back taxes owed.

The IRS will only accept a written and signed opinion of a qualified tax professional as evidence of your motives, so get it in writing. Never assume. Always check. Do the homework.

The IRS has published the regulatory changes that have affected retirement plans on a year-by-year basis.

Do-It-Yourself Legal Documents Available On The Internet

Similarities exist between being an attorney and being a doctor, but to fully know proper medical care requires much hands-on training and experience. Knowing the law is just a matter of reading books.

Therefore, with enough reading and understanding of the specific area of law, anyone should be able to create their own will or set up their own trust fund, especially with the help of do-it-yourself legal forms and software available on the Internet.

One of the problems with that line of reasoning is that it does not take into consideration the accumulated knowledge and experience of a professional. Another problem is that a do-it-yourself kit takes a one-size-fits-all approach that may not consider your individual life circumstances or your personal intentions and goals.

If you do decide to use legal form templates, you should carefully consider the language you include in your documents, because every written term means something specific.

It is important to research and fully understand the true legal meaning of each term you use, so you do not include conflicting terminology that might dramatically change the legal interpretation of your intentions.

Underwater Homes Do’s & Don’ts

Another topic we discussed during this hour-long show was the do’s and don’ts of dealing with an underwater home.

Obviously, the home mortgage and lending environment has dramatically changed in the past few years. We have recently read several articles about the astonishingly high percentage of homes in the U.S. that are underwater (currently valued at less than the amount still owed on its mortgage).

The numbers range from 29% to 39% in different parts of the country, and they differ in the various articles we’ve read, but it seems safe to believe that about one-third of all home in the country are now underwater, to varying degrees.

If you drive around residential neighborhoods here in the San Francisco Bay area and see all of the empty houses and For Sale signs, you should have no problem believing the reports that indicate California is near the top of the state list for underwater real estate.

Some professional financial advisers suggest you should walk away from an underwater home if it has become devalued by more than 10% to 20%. That seems like a broad statement and a wide range of real estate valuation upon which to make a critical decision.

“It Depends”

Our usual response to broad advice is, “It depends.”

This reply is taught in law school as a useful initial default answer to any legal question, because it allows for further consideration, to determine in advance how individual circumstances might affect the outcome of a specific situation.

In a situation where someone is considering the option of abandoning an underwater mortgage from which they apparently can find no other relief, we would want to consider the answers to several questions before we could agree that is the best solution, such as:

  • Is the mortgage at a fixed or adjustable rate?
  • Have you considered and exhausted every other less-drastic option?
  • How important is your credit rating in the near-term and long-term?
  • Are you near retirement? Do you or will you soon live on a fixed income?
  • Do you have the ability to earn more money?
  • If you are a business owner or partner, will the negative impact to your credit score hurt your ability to stay in business?
  • Can you still obtain and afford the business liability insurance required to operate?

The results of your actions may not be the same as for someone else who does what appears to be the exact same thing you did. The underlying set of circumstances of your life ultimately determines your results.

Go to Radio Show Podcast ArchiveEven if you follow all of the rules, some circumstances in today’s real estate and financial markets are completely out of your control and your results are a matter of luck – good or bad – as we have written about concerning loan modification as an option for an underwater house.

Our free advice in this and all stressful legal situations is that you should not make emotional or rushed decisions, but to instead carefully consider all of the facts, related laws, and options available for your specific set of circumstances and goals.

Cancellation of Debt for Short Sale or Foreclosure 

During this edition of our broadcast, we also discussed a few issues related to the Mortgage Debt Forgiveness Relief Act, which expires at the end of this year, including:

  • Form 1099C, Cancellation of Debt (for short sale or foreclosure)
  • Acquisition debt
  • 3 types of mortgage forgiveness
  • Possible extension of the law beyond 2012
  • Solvency versus insolvency
  • The advantage of disputing debt

For more about these sub-topics, you can listen to a podcast of this show by streaming or downloading the MP3 audio file in our podcast archive.

If you have questions or concerns about any of the topics mentioned above and would like a free consultation with Connie Yi, a California estate planning attorney, please contact us. We have four conveniently located offices around the Bay area: San Francisco, San Mateo, San Jose, and Pleasanton.

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