What is a Federal Tax Lien?

A Federal Tax Lien (FTL) is a legal instrument that secures the claim of the United States in the right, title, and interest of a debtor taxpayer's assets. It is a public document and is recorded at the County Clerk's office or the Secretary of State, depending on local law. This is done to serve notice on all creditors or other interested parties of the government's claim.

The Federal Tax Lien is a negative item on the credit bureau report of the debtor. It may result in some creditors calling in their notes upon becoming aware of the FTL.

The FTL generally becomes the most senior claim against the debtor's assets with the exception of first mortgage holders who have properly filed financing documents. The Federal Tax Lien  may also displace the primary security position of factoring firms lending on accounts receivable and bank revolving lines of credit 45 days after filing (each situation is unique and must be considered on individual circumstances). Certain claims may trump an FTL such as legitimate mechanic's liens, local taxes, and perfected landlord liens.

In some jurisdictions, local law provides for separate filing of liens for real property and personal property. In that case, the IRS will file two identical liens, one under personal property records and one under real property records. Failure to file both could result in the government's claim not being perfected on all assets. If the debtor is a corporation, failure to file at the Secretary of State may also result in an imperfect claim depending on local law.

The FTL is the basis for IRS legal authority to foreclose on debtor assets by conducting a seizure. Since the IRS Reform Act of 1998, seizures by IRS Revenue Officers have dropped dramatically. The lien is not to be confused with an IRS levy. The IRS can levy on a debtor taxpayer's bank accounts or wages without a FTL. IRS only needs a valid assessment and must have served legal notice in the form of a certified mail letter to the debtor's last known address 30 days prior to levy. However, often the IRS has filed an FTL before levy action even though it is not required.

If not filed, a FTL can be avoided by entering into an Installment Payment Agreement with IRS in most cases.  Once filed; absent special circumstances, it is not released until the debt is satisfied. One may negotiate with IRS to subrogate the federal lien to another debt if it is in the mutual interest of the government and the debtor taxpayer.  A lien may also be discharged from a specific property if IRS approves and gets proper financial consideration. Normally, only if the FTL is paid in full, the statute of limitations expires, or IRS agrees to an Offer-in-Compromise and is paid a settlement; will the FTL be released.

One can appeal the filing of a FTL but they must have a good case to overturn one.  If you can show that the FTL will actually hurt the ability of the government to recover payment or that the tax assessment is incorrect, there is a chance of succeeding.

Hire a good Certified Public Accountant (CPA), Enrolled Agent (EA), or Tax Attorney if you need IRS help.  If you cannot afford professional assistance, the IRS does have help in the form of the Taxpayer Advocate's Office. The help is hard to get because you have to go through some "red tape."  But if you try hard, they might work with you.           

Federal Income Tax Deductions 2011

Tax filing is a requirement for all American citizens who have a source of income. It can  be a serious headache for those who are not knowledgeable about what is deductible and what can not be deducted on their federal income tax return. There are numerous deductible items you can take on your tax return to reduce your tax liability. These deductible items are usually filed on schedule A form 1040.

Before you file your 2011 tax return find out if you may reduce your tax liability by taking qualified Federal Income Tax Deductions. It will be a good practice if you keep good records and you understand what deductions to declare and save money during tax time.

Real estate taxes you paid during the year are deductible on your federal income tax return on schedule A form 1040 when you itemize. Also deductible are state and local income taxes, general sales taxes and other property taxes, such as automobile excise tax. You can also deduct interest you paid on your home mortgage and home equity loan or line of credit. Points you paid that are in connection with your mortgage loan are also federal tax deductions. You may quality for student loan deductions if you meet the required income limitation. Health care is also a deductible item. You may qualify to deduct your out of pocket health care expenses if they add up to 7.5 percent or more of your adjusted gross income. You may deduct expenses you made for medical and dental care for yourself and your dependents.

Also deductible are health insurance premiums, hospital expenses and co-pays. Take note that you may deduct health related expenses that are not paid by your medical insurance company. Business expenses are deductible on your federal tax return. As an employee, the money you spent on uniform, union dues, and trade magazines are deductible on schedule A form 1040. Moving expenses are deductible if you relocate to take another job in your industry. The cost of business travel, lodging and meals may be deducted within certain guidelines. Donations to charity are deductible on schedule A form 1040. When you make contributions, keep records and receipts to back up with your contributions. Deductions are limited to the fair market value of your donation. You may take mileage deduction for charity related travel. You are entitled to tax deductions if you are a victim of natural disaster or incurred losses through theft or vandalism. Losses reimbursed to you by your insurance company are not deductible on your tax return.

In order to save money during tax time and reduce your tax liability visit Federal Income Tax Deductions 2011 and take note of the deductible items that will be beneficial to you.           

How to File a Tax Extension

We all have those months: everything seems to go wrong, deadlines sneak up out of nowhere, and you fall behind.

Unfortunately if things start to go south over the next month or so, your taxes are going to be affected. This year we all get an extra two days to file -until April 17, 2012! - but that may not be enough extra time to get everything in order.

Don't worry. The April tax deadline is not the end of the world. If you can't get your return in to the IRS by then, you can request an extension. All you have to do is file Form 4868 [Application for Automatic Extension of Time to File U.S. Individual Income Tax Return].

An extension gives you an extra six months - until October 15, 2012 - to file your return without accruing any of the penalties or interest that normally accompany taxes filed after the deadline.

An extension can be great, but there's a catch: even though you have until October to file your actual return, you still have to pay the taxes you owe by the regular April 17 deadline.

This may sound counterintuitive, but on Form 4868, which you have to file in order to request an extension, also requires you to estimate your tax liability. If that happens to be a refund, great, you can file for an extension without paying anything. But, on the other hand, if it turns out that you owe tax, you have to pay the IRS when you file for an extension.

If you don't pay, they may well grant your request for an extension, giving you a six month reprieve on failure-to-file penalties. But your unpaid tax liability will begin accruing failure-to-pay penalties and interest on April 18. So it's best to go ahead and pay your estimated tax liability when you file for an extension.

When you do finally end up filing your return - sometime before October 15 - the IRS will make up the difference between your actual tax liability and what you paid as your estimated tax liability. If you didn't pay enough originally, you will have to make an additional payment to the IRS. But if you paid too much you can look forward to a refund.

U.S. citizens or residents who are "out of the country" should know that they automatically get an extra two months to file and pay their taxes - even without requesting an extension. But then if they do need an extension, it will only grant an additional four months, not the usual six.           

How Do I Get a Copy of My Federal Income Tax Information?

A financial situation as come up where you need copies of your federal income tax return and it's of the utmost importance you get the information as soon as you can.

Unfortunately you have no idea where you or your spouse placed the "important papers" of the household.  You called your tax accountant and he just happens to be on vacation.

What do you doall

There are a couple of options that are available to you. There are tax account transcripts and tax return transcripts.

The tax account transcript is the best of the two because it will include any adjustments that were made after you filed.  The type of information included are your adjusted gross income, taxable income, your marital status and whether you filed a long or short form 1040.

The tax return transcript will show line items from any of the three types of forms for filing a federal return.  They are the 1040 EZ, 1040A and the Form 1040.  Usually the tax return transcript would be sufficient if you need proof to apply for a bank loan.

You can request either type of transcript by mail or by phone.  The phone number is 1-800-829-1040.  If you wish to request a transcript by mail you'll need the IRS address that pertains to your specific area. If you need a photocopy of a previously processed tax return request  Form 4506 which is a Request for Copy of Tax Form.

As with most things, there is a fee of about $40 you'll need to pay for each tax period you request.

Of course to avoid having to go through all of this, please keep your income tax papers in a safe location where you're able to retrieve them when you need them.           

How To Search California State Tax Lien Records

In terms of picking a high yielding investment, tax liens might bring decent returns if bought wisely. It is very important to know how long the term of the tax lien certificate will run and what happens if not paid. Investors receive very advanced returns for short periods of time, and it is guaranteed with real property. Most people assume that doing research and proper background checking on a property can eliminate all the risk involved in tax lien investing. You decide to know what happens when people choose to avoid their tax lien payments'

You should contact the tax agency and they will inform you on all the things that could possibly happen to you. Normally you are required to put down at least 10 percent of the price; other rules, regulations will be discussed by the court appointed referee. Foreclosing on your tax lien certificates can be as easy as filing an application for the process with your county court in some states. Whenever you wish to dispute the tax lien amount or charge against your property, the sale may still go to auction after the specified time to pay has expired.

You want to sell or refinance your property; you must pay off the tax lien to get a clear title; this will be the only way to make refinancing possible. You need to research tax lien and get an understanding on what happens during the process; therefore, you might be able to take the necessary steps to avoid this from happening. Each of the fifty states in the us have different laws on tax liens and may even differ by county as well. A tax lien auction can take place when the state or local government imposes a court-ordered auction for your property taxes. If you wish to contest the charges of your tax lien, you should still make your payments in case you lose the decision. You necessarily need to get all of the facts when you receive your tax lien information in the mail; this will help you to set up a payment plan to avoid further actions taken by the authorities.

Depending upon how late you are on your property taxes, the government may issue a tax lien on your property. In terms of volatility, tax lien investments do not face any ups and downs of the stock market as other investments might. An auction of a tax lien certificate usually involves selling a certificate to claim the total taxes owed and any administrative charges and interest on the amount owed. While most individuals feel that purchasing a tax lien certificate a real investment; it is still wise to know as much as information as possible about the property.           

Tax Rates - Going Up

Over the next year or two it is very likely that tax rates on income, capital gains, and dividends are likely to go up. That is an unfortunate but likely reality especially for those people whom the politicians consider "rich" like most of the people who receive this newsletter. Rising tax rates are a virtual certainty and a promise if leading presidential candidate Barak Obama wins the election this fall (he is currently ahead in the polls). Longer term over the next 10-20 years it is also very likely that we will have higher tax rates due to the current budget deficit and the looming Social Security/Medicare financial shortfalls. Those social programs face severe financial shortfalls over the next 20+ years and taxes will have to be increased, or benefits substantially reduced, or both to keep those programs alive. Fixing the Alternative Minimum Tax will not be cheap either.

Part of the problem is that we have just been spoiled and lucky over the past 20 years by lower than usual tax rates on income and investments relative to US history. The government has kept tax rates low, allowed government spending to grow too fast, run budget deficits, and deferred facing reality by delaying fixing the long term Social Security/Medicare financial problem.

The current top federal marginal tax rate on income of 35% is well below the average in US history and is near the lowest it has been since the 1930's. The top rate was as high as 90% in the 1940's and 1950's, dropped to around 70% in the 1960's and 1970's, and dropped to around 50% in the early 1980's. We have been lucky to have had a top tax rate on income of between 30% and 40% since the late 1980's. There is lots of room for that top tax rate to go up, looking at history.

The current 15% tax rate on capital gains and dividends is also very low relative to history, and is probably the lowest we will see for several decades. This low 15% rate on capital gains is the lowest since the 1930's in the US. Typical capital gains tax rates in US history since the 1940's have been in the 20%-40% range. If nothing happens the Bush tax cuts will expire over the next year or two and then capital gains and dividend tax rates will jump back up automatically.

Presidential Candidates McCain and Obama on Future Taxes
Barack Obama is calling for higher taxes (ordinary income tax, capital gains tax, dividend tax, and social security taxes) on families earning more than $250,000 per year. Obama wants to raise the top ordinary income tax rate from 35% to 39.6%. He says he will not raise your taxes if your income is under $250,000 and "chances are you will get a cut". He wants to raise the tax rates on capital gains and dividends for "rich" people from the current 15% rate to somewhere in the 20%-28% range. On estate taxes Obama is proposing a $3.5 million exclusion for 2010-2011 and beyond and a top estate tax rate of 45% (the same as the current federal estate tax rate).

John McCain wants to make permanent the current federal income tax rates (top rate of 35%), and cut corporate tax rates from 35% to 25%. He opposes the Obama plan to lift the earnings cap on the social security payroll tax. McCain wants to keep the current 15% tax rate on long-term capital gains and dividends. With a likely democratically controlled Congress he may have to compromise and these capital gain/dividend tax rates may go up anyway to the 20% level. On estate taxes McCain proposes raising the exclusion to $5 million for 2010-2011 and beyond and cutting the estate tax rate to only 15%. Of course all political campaign promises and tax plans from both sides should be taken with a huge grain of salt.

What smart things can you do about rising tax ratesall

1. Sell some assets you own that have a big capital gain now while the rates are low.  If you have an asset with a large long-term gain that you were thinking about selling anyway in the next couple of years you may want to consider selling it now before the capital gains tax rates go up. This may be especially true if you have other reasons to sell the asset as well (concentrated stock/option position in one stock, concentrated family business holding, large real estate holding, a big holding that has had a huge run up recently, etc.). For investments that you may want to hold for a long time it may be better to just continue to hold on to them and let the tax-deferral continue for many years.

2. Use Roth IRA and/or Roth 401K accounts if you can. Roth accounts are taxed now (with current low tax rates) and are tax-free later when you start withdrawing the assets (and when income tax rates are likely higher). Therefore if tax rates go up in the future you will not care (as much) because assets withdrawn from Roth accounts are not taxed. Many people have incomes that are too high to be eligible for Roth IRA accounts (modified adjusted gross income must be below $116K single or $169K for a couple). Under current law (which may be changed) investors of all income levels will be allowed to rollover their current IRA's (of any size) into Roth IRA's in 2010. This could be a smart thing to do in 2010 if future income tax rates turn out to be significantly higher than they are in 2010. Of course if Obama wins the election income tax rates may already be higher in 2010.

3. Continue to give assets with large capital gains to charities. You get the full value of the asset as a deduction regardless if the capital gains tax rate is 15% or 25%. If income tax rates go up your charitable deduction is actually worth more against your income taxes.

4. Factor in higher tax rates in your long-term financial planning. The bottom line is you will need to save more, spend less, work longer, or invest smarter to make up for the higher future tax rates. This is especially true if most of your net worth is in tax-deferred IRA's and 401K's which are taxed at the full ordinary tax rates when withdrawn in retirement. Your tax rate in retirement could be as high (or higher) than your current tax rate.

5. Buy tax-exempt municipal bonds. These bonds typically benefit when ordinary income tax rates rise. Don't buy these in your tax-deferred 401K or IRA accounts.           

Federal Income Tax

Federal income tax is withheld from the pay of almost all employees.  Employee pay is inclusive of salaries and wages, bonuses, commissions, and vacation allowances. It is the responsibility of the employer to provide the employee with a W-4 at the onset of their employment.  The determination of tax withheld is computed from the information provided on the W-4.  The employee must inform the employer of their withholding status (married or single), and the number of exemptions they will be claiming.

Employees also have the option to have an additional amount withheld from their pay.  If, over the course of an employee's employment, they wish to change or adjust their withholding rates, they may simply request to complete a new W-4.  Publication 919 "Getting the Right Amount of Tax Withheld" is available from the IRS and can assist employers and employees in making the best choices for withholding correctly.

Factors that will affect the amount of federal income tax withheld from an employees check include marital status, number of exemptions, or an employee has more than one job at a time.  These factors will affect federal income tax computations, and should be included in information provided by the employee at the time of employment. Some employees, due to filing status, number of exemptions or allowances, and earned income totals below the national poverty level, will qualify for Advance EIC payments.  These are advance payments of a refund of federal income tax.  Advance EIC payments are made on the employee's paycheck each pay period, if requested.

Contributions to qualified 401(k)'s or any other program that allows deductions of "pre-tax" contributions will affect the amount of federal income tax withholding for each pay period.  Generally, contributions to a 401(k) or other retirement program are a benefit to the employee at the end of the tax year.  These contributions provide a tax break and reduce the amount of federal income tax due, while providing retirement benefits to the employee.

Other factors affecting federal income tax liability are filing status, number of exemptions claimed on your personal tax return, individuals with more than one job, child tax credits, education credits, itemized deductions,  and nonwage income.

At the end of the tax year, employees are furnished a W-2.  This is a summary of the wages paid and all deductions taken from the employees gross pay over the course of the past tax year.  All employers are required by law to furnish employees with a W-2 no later than January 31st of the next tax year.

To summarize, federal income tax withheld from an employee's pay can be affected by changes to the employees wage base, filing status, or simply the acquiring of a second job.  All employees should take the time to review their filing status based on the information provided on their W-4 and make changes to withholding status and exemptions claimed as needed.