My interest in taxes is both economic and genetic. My late father was a CPA for more than 60 years and at age 90 or thereabouts was renowned both for driving an Alfa Romeo and for auditing complex corporate books.

At an early point my father took me aside to explain the facts of life. I’m not sure I remember all the details, but in the midst of this discussion he mentioned something about the necessity of paying taxes, and to help in this endeavor he provided a calculator.

Now you might think, aha, a “calculator,” one of those electronic thingies that are now so cheap they’re given away in cereal boxes. Nope. This was before electronic calculators and not much after the invention of writing.

My father endowed me with a 12-pound Brunsviga-Midget, a 1910 device that requires neither batteries nor electricity. Instead, it consists of a sturdy oak board topped with a crank-powered collection of steel cogs and gears. By adjusting studs on a series of metal tumblers, turning the crank and moving a sliding registry, one can add, subtract, divide and multiply up to 18 places with absolute accuracy.

Thus armed with vast computational power, I have attempted over many years to violate the norms of financial sanity and common sense by doing my own tax returns. Each April I dutifully review all receipts and records assembled in a suitable shoe box, then sort and re-sort into various categories, enter the results by hand onto whatever forms the government suggests, add and subtract as appropriate and pay whatever it is I owe.

This system worked fairly well at the beginning of my adulthood. However with each passing year, the process has become less effective. While early returns could be mailed with a single stamp, the latest models vie with a Stephen King novel in terms of heft and complexity.

And although the part about the shoe box and the receipts remains largely unchanged — I’m sure Enron used the same system — figuring out what it all means has become decidedly more tangled. In an effort to spare the Brunsviga, I have sometimes resorted to paid assistance. But this year I decided to do something different: I broke down, spent $29.95 and bought the software necessary to complete my federal and state tax returns.

I’m not convinced that the results produced by this electronic wonder are especially different, or different at all, from the final figures that might have emanated from the Brunsviga. However, even I am awed by the ability of such software to automatically fill in lots of forms at once, write legibly and instantly generate 26 pounds of financial reportage.

It’s the end of an era. But although there is much to recommend the newest technological advances, I’m not certain society benefits.

Government is powered by taxes, and the more we know about who pays and who doesn’t, the better we understand how government works and what it really costs. When taxes are calculated on the dining room table with much sweating, cursing and irritation, we at least partake in the system; the usual distance between government and the governed disappears.

For instance, this year you can write off state sales taxes if you do not deduct state income taxes. This is a benefit largely for folks who live in areas without a state income tax. Makes sense — until you read the rules.

“State taxes on motor vehicles,” says one government directive, “also are deductible as a general sales tax if the tax rate was more than the general sales tax rate, but the tax is deductible only up to the amount of the tax that would have been imposed at the general sales tax rate.”

Right.

Do your taxes using a computer program and you may not notice that medical bills equal to 7.4 percent (or less) of your gross adjusted income are not deductible — you need to be sicker to get write-offs. Given that we live longer, isn’t it time we reserved an extra write-off for those age 75 rather than comparative youths who have just turned 65? Why are there special write-offs for farmers, day-care providers and the clergy — but not for nurses or ambulance drivers? Who do you really need if your appendix bursts?

The issue is not so much that such limitations exist; rather it is the fuzzy process that produces them, the evidence of who has political power and who doesn’t.

Great industries have been created from single and obscure paragraphs hidden within the tax code, a body of rules so complex no one fully understands what’s been written or why. Truth is, automating returns undermines the common good. Rather than speed and efficiency, perhaps we need a tax system that makes citizens ask tough questions and causes political leaders to squirm every time they spend our dollars.

The time has now come to pass on a great tradition. Shall it be the Brunsviga or the software? Oh, children, Daddy wants to talk to you . . .

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Published originally by the author in The Washington Post, April 18, 2005.

April 15th: The Right Way To Figure Taxes is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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The original HUD-1 was developed as a by-product of the Real Estate Settlement and Procedures Act of 1974 — or, as it’s usually called, RESPA. Prior to 1974 settlement forms could be different, meaning that it was very difficult to compare costs or to know what was deductible for tax purposes in the year of the transaction.

So what do we get after 36 years? The new HUD-1 is a vast improvement over the old model. It’s three letter-sized pages long rather than two legal pages, but there’s much more information in the new HUD-1. Buried in the form is an accounting of closing costs and perhaps even some write-offs. Buyers will find the full and complete cost of buying real estate while sellers will see how much cash (if any) they’re getting from the transaction.

Page One

The first page of the form is a summary of the transaction. In effect, it translates the sales contract between buyers and sellers into hard numbers.

At the top of the form we first have administrative data such as:

• The type of loan (conventional, VA, FHA, etc.).
• The place and date of settlement (the date can be very important for tax purposes).
• The mortgage insurance case number (important if you’re ever facing foreclosure).
• The street address of the property. This is a concern because for great clarity and assurance the form would be better if it also included the legal address of the property.
• The name of the settlement (or closing) agent. The party that conducts the settlement is typically regarded as an agent of the settlement process. In other words, they do not represent you.

Page One, Buyer’s Side

The HUD-1 shows transaction costs for both buyers and sellers — you get to see what the other person’s information. More important you get to see your own.

On the right side of the first page we have buyer costs grouped by sections.

Section 100 — This is where buyers see the cost of the property and the cost of settlement (the figure found on line 1400). Combine the two and you get the gross amount — but not the final amount — due from the purchaser.

Notice that there can be some adjustments in this section. For instance, it may be that the seller has paid local property taxes in advance — those payments would be a credit to the seller and a cost at closing to the buyer.

Section 200 — As a buyer you may have certain credits to offset your gross costs. Credits include such things as your deposit, your new loan (for closing purposes the mortgage is a credit to the borrower because it represents money brought into closing) and any additional financing.

In the 200 section you can also see adjustments which are a credit to the buyer. For instance, maybe the seller still owes some property taxes.

Section 300 — This is a re-cap of all costs and credits. If you take the gross amount due from borrower (line 120) and subtract the buyer’s credits and cash you then get the total cash due to — or from — the borrower.

Most buyers, of course, will need to bring “cash” to settlement. By “cash” what most settlement agents really want is a certified check or a cashier’s check. Also, it may be possible to wire funds to the closing agent. Always ask the settlement provider well in advance of closing how payment can be made.

Gifts: To assure lenders that you are not somehow getting a secret loan from someone, it’s best to have closing funds in your name and on deposit for at least 90 days. If you are getting a gift to close, ask your lender how the gift is to be documented and precisely follow the lender’s instructions.

Page One, Seller’s Side

Settlement is a moment of truth for owners, the time when you find out exactly how much or how little you’re getting from your sale.

Section 400 — The sale price of the house, plus the cash paid for any personal items, are shown here as credits to the owner.

Also in this section are adjustments — credits for property taxes and other costs paid in advance.

Section 500 — If any mortgage debt remains unpaid it shows up here as a cost to the seller. Also, the costs of closing (line 1400) are here as a deduction as well as any adjustments for such costs as unpaid property taxes.

Section 600 — If we take the gross amount due to seller (line 420) and subtract the seller’s closing costs (line 520) we can then see how much cash the owner will get from closing (or, how much cash is needed to close if the seller is upside-down).

Practices around the country regarding cash to owners at closing vary. In some areas there are “wet” settlements where the owner gets a check at closing, in other areas there are “dry” closings where it takes a few days to get a check because it takes time for the lender to fund the transaction and paperwork to be recorded. In some jurisdictions there are rules requiring the disbursement of cash with a few days. For specifics, speak with your settlement agent.

Page Two

On the second page of the new HUD-1 we have a series of sections which show costs that may be paid by either buyers or sellers — or split between them. In other words, these are costs which can be negotiated when a sale offer is made. For instance, in a slow market a seller might agree to pay all transfer taxes. In a hot market, the buyer might pay.

Section 700 — If one or more real estate brokers are involved in the transaction, this section will show the compensation to each broker and the cost, if any, to buyers and sellers.

Section 800 — Getting a mortgage is hardly free. When the buyer applied for financing the lender provided a Good Faith Estimate of Closing Costs (GFE) on the new form developed by HUD. This section shows such costs as points, origination charges, appraisal fee, credit report and tax service. Borrowers should check the numbers at closing with the estimates provided in the GFE. The costs shown on lines 801 (origination charge), 802 (points), and 803 (adjusted origination fee) must be the same as the GFE.

Please see our guide to the new Good Faith Estimate form to see how it’s coordinated with the equally-new HUD-1.

Section 900 — Closing is scheduled at a time which is mutually-agreeable to the buyer and seller. That time, however, will mean that for such items as interest, mortgage insurance premiums and homeowner’s insurance there will likely be a need to make some payments for daily costs in advance until the next billing period.

Section 1000 — If you purchase a home with less that 20 percent down the lender will likely require that you pay additional amounts each month for property taxes and insurance. This money is held in an escrow or trust account and then paid out as the bills come due.

If you will have an escrow account then the lender will typically collect money in advance from borrowers to assure that the escrow account is properly funded.

Section 1100 — As part of the buying process, sellers typically promise to deliver good, marketable and insurable title — and buyers should want nothing less. This section shows the costs for title insurance — both lender’s and owner’s coverage.

Lender’s cover — which is required by lenders if you finance the purchase — protects you up to the remaining loan balance in the event of a title claim. In other words, it protects the lender.

Owner’s coverage protects you if there is a title claim up to the purchase price of the property — in other words the loan amount plus your equity. Be aware that some title insurance policies have an inflation rider so that the value of the coverage can actually increase over time. For specifics, speak with your title agent.

Also, take a look at line 1107. This shows the commission paid to the settlement agent for providing title insurance.

Section 1200 — This is where you can see how much state and local governments are getting from the transaction. Governments are elated when homes are sold because such transactions are a major source of revenue. Government taxes can includes such things as deeds, releases, transfer taxes, state taxes, stamps, etc. Call it what you will, a tax is a tax.

Section 1300 — This is where you can find additional settlement costs.

Section 1400 — The total costs to close — this number also appears on lines 103 and 502 on the first page.

Page Three

The third page of the new HUD-1 is partially a confirmation that the costs outlined in the Good Faith Estimate are what you’re actually paying — or pretty close.

Some quoted costs on the GFE cannot be changed, some can be changed as much as 10 percent and some can simply change with the winds.

Also shown on page three is a recap of your loan including the mortgage amount, interest rate, loan term, ARM-related terms (if any), prepayment penalties (if any), balloon payments built into the loan (if any) and related matters.

IMPORTANT: Always keep your closing papers in a safe place for tax reasons and to assure that your loan terms are actually the same as disclosed on the HUD-1. For questions regarding closing issues, speak with your real estate broker, mortgage lender and closing agent. Be aware that some costs found on a HUD-1 may be tax deductible — for specifics speak with a tax professional.

How To Read The HUD-1 is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Points paid to refinance a home must be paid out over the loan term. Example: if you refinance, get a 15-year, $100,000 loan and pay a point, $1,000, at closing, then you would deduct 1/15th of $1,000 each year. If you paid off the loan in 10 years, any remaining point costs are deductible in the year when the loan was repaid.

There is a catch to the general concept of points and deductibility: Imagine if you paid a point to finance and then, 10 years later, you refinance with the same lender. Can you claim the balance of that original point in the year you refinanced? The IRS says “no.”

“If you spread your deduction for points over the life of the mortgage,” says the IRS in Publication 936, Home Mortgage Interest Deduction for Use in Preparing 2003 Returns, “you can deduct any remaining balance in the year the mortgage ends. However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Instead, deduct the remaining balance over the term of the new loan.”

Also, there are situations when points paid by a seller to help a purchaser buy a home may be deductible.

Please see a tax professional for specifics and the latest information.

Mortgage Points And Tax Deductions is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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