Gov. Lamont Proposes New Taxes on Legal and Real Estate Services

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Governor Lamont Made an Address on his budget and shared a snippet on twitter.

Also Increases Conveyance Tax On Expensive Homes

First-term Governor of Connecticut, Ned Lamont, is introducing a new bill – to implement his proposed budget – that would expand the sales tax on services in Connecticut to legal and real estate related services. The bill also increases the conveyance tax on homes over $800,000.00.

You can see the full version of the proposed bill here: https://www.cga.ct.gov/2019/TOB/s/pdf/2019SB-00877-R00-SB.PDF. The good news is that many of the changes in the bill, if it becomes law, will not go into effect until 2023.

What types of “legal services” would now have to charge sales tax?

The proposed bill uses NAICS industry codes to outline the types of legal services that would have to charge sales tax to clients and pay over that sales tax to the State on a monthly basis.

The legal service providers covered under the new expanded sales tax law are:

  1. Lawyers;
  2. Notaries;
  3. Process servers;
  4. Paralegals;
  5. Settlement Agents; and
  6. Title companies.

What types of “real estate services” would now have to charge sales tax?

Under Lamont’s proposal, the real estate service providers that would have to charge and remit sales tax in Connecticut are:

  1. Real Estate Brokers;
  2. Real Estate Agents;
  3. Property Managers;
  4. Appraisers;
  5. Inspectors;
  6. Escrow Agencies or Escrow Companies; and
  7. Real Estate Consultants.

[NOTE: Some of the services listed above may already be subject to sales tax collection and reporting earlier, but if the Governor Lamont’s Proposed Bill is passed (without changes to these provisions), there will be no question that the above service providers will be subject to sales tax.]

Top CT Real Estate Conveyance Tax Would Be Increased to 1.5%

Right now, every time residential real estate is sold in Connecticut, the Seller pays 1% in conveyance tax which is divided in the following way:

For houses sold for under $800,000: 0.75% is paid to Connecticut and .25% is paid to the local government.

Currently, for homes over $800,000, the seller pays an higher conveyance tax – at the increased rate of 1.25% – to Connecticut for sales proceeds over the $800,000.00 threshold (not a rare occurrence in most populated areas of CT!)

Proposed Connecticut Tax Laws would nickle and dime property owners, along with small business service providers and their clients.

The proposed bill would actually increase the State’s portion of the Conveyance Tax to 1.50% on any amount over $800,000.00 in the conveyance of commercial real estate.

This change would take effect this year on July 1st!

The Impact On Real Estate Clients

These new laws will directly impact the cost of buying, selling and maintaining real estate in Connecticut, whether for residential, business or investment purposes.

Buyers of real estate would pay sales tax on realtor admin fees, title search and title insurance fees, attorneys fees, paralegal or document preparation fees, appraisal fees, inspection fees, and any consultation costs.

Sellers of real estate will have to pay sales tax on attorneys fees, realtor fees, real estate broker property advertising charges, paralegal or document prep fees, release tracking, and an increase in a portion of the conveyance tax over $800,000.00 in purchase price.

The Impact on Legal and Real Estate Service Providers

The impact on the legal service and real estate service providers will be severe in the beginning. The learning curve for how to properly charge, collect, track and remit sales tax will take some time. The increased time to handle this compliance may take away from time spent doing the actual work or servicing the client. Over time, Service providers will probably outsource these tasks to third parties, meaning that consumers of these services would pay more for those services.

CP40 form From IRS We assigned your overdue tax account to a private collection agency

The IRS Won’t Call You. They hired Debt Collectors to do that for them!

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Congress Mandates IRS Use Private Collection Companies to Collect Past Due Taxes Beginning Spring 2017

 

CP40 form From IRS We assigned your overdue tax account to a private collection agency

Poor Eric!

I Received A Collection Letter Regarding My Taxes

IRS Now Uses Private Collection Agencies

As part of a law passed in December of 2015, the IRS will begin using private collection agencies as of Spring 2017. The IRS has actually had the option to use private agencies and had DECIDED NOT TO. As the taxpayer advocate mentions in her 2013 report, it was not very effective. However, Congress decided that they know better and passed a law that states the IRS SHALL use private collection agencies. The idea is to remove some of the cost of collection from the IRS and lower the impact on “government spending”.

5 Reasons Why IRS Using Private Debt Collectors Is A Bad Idea

  1. INCREASE IN IRS SCAM ACTIVITY. Previously, when people received scam calls from fake IRS agents, the IRS would release notices stating that they will never call you and any call is a scam. However, now that they are using private collection agencies, there will be legitimate calls regarding IRS debt. This plays right into the hands of scammers and con artists!
  2. PRIVATE DEBT COLLECTORS HAVE LESS POWER THAN THE IRS. Debt Collection Companies must follow the Fair Debt Collection Practices Act. The IRS only has to follow it’s own policies and procedures and has powers way beyond a collection agency. On top of that, the tax debt collection agencies will have to follow BOTH Fair Debt Collection laws AND IRS policy and procedures.
  3. THE PEOPLE CAN’T PAY. The accounts the IRS plans to pass onto the collection agencies are those that are grossly past due. These people couldn’t afford to pay when it was the Federal Government asking, the money isn’t magically going to appear because a debt collector called.
  4. IRS USING PRIVATE DEBT COLLECTORS HAS FAILED BEFORE. That’s right, they already tried this! and Failed! When the IRS used private debt collectors between 2005 and 2009, they eventually concluded that it wasn’t cost effective – after they were committed to the idea for a while.
  5. IT’LL PUSH PEOPLE TO BANKRUPTCY. When you have already had the weight of tax debt hanging over you, the additional burden of constant calls from a debt collector could be the final straw that pushes people to bankruptcy. Bankruptcy isn’t a guaranteed solution to tax debt, but many more people will begin looking into it with tax collectors calling.

 

Can Tax Debt Be Discharged in Bankruptcy? It Depends.

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Tax Problems with the IRS or State Usually Are Not the Reason People File for Chapter 7 Bankruptcy

It seems to all come at once, doesn’t it? Generally when a person makes the decision to file for “bankruptcy protection,” tax debts are an afterthought. Other debts are usually the driving force behind a bankruptcy petition. But not carefully considering whether or not tax debts will be discharged through bankruptcy is a mistake, that – unfortunately – too many clients with tax problems make before they talk to an Attorney familiar with IRS procedures.

It usually goes something like this: a small business owner who has personally guaranteed loans for his or her business can no longer stand the constant calls from creditors. Business has fallen drastically, and it seems that there is no way for the client to dig himself out of the hole he is in. Since he is self-employed, and struggling to make ends meet, he probably hasn’t paid (and perhaps hasn’t even filed) his taxes for several years.

 

Wondering whether the bankruptcy route is the best way to dispose of your tax debts?

Set up a phone call with our Tax Attorney to discuss your options. ☎ Schedule with Attorney Groth

I’ve seen court transcripts of judges and lawyers in family court all agreeing that income taxes are non-dischargeable. This is a common misconception within the legal community. I have also heard the same types of statements from actual bankruptcy attorneys or other tax professionals. The truth is that the most common type of tax debt – income tax liabilities –  will almost always be dischargeable in a Chapter 7 bankruptcy at some point. The trick is knowing the rules and understanding what has gone on with a taxpayer’s account before filing the petition. (I have personally seen clients miss out on discharging a liability because they filed a petition two weeks  too early.)

Tax debts usually are not the driving force between filing for a Chapter 7 Bankruptcy liquidation because the IRS, a government agency, is slow (at first) to collect the liabilities, and the IRS does not call business owners non-stop or send threatening letters as often as other creditors. Couple that with the assumption that too many clients and other attorneys make – that income taxes cannot be discharged in bankruptcy – and costly mistakes happen. So what are the rules for discharging tax debts in bankruptcy? Keep reading to find out.

Read more →

Taxes and PowerBall: What to do with your $4.3 Million

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The Powerball has never been so high – so here is my obligatory blog post on what to do when you win the jackpot.

The most obvious answer is a pretty simple one – don’t worry about it. Everything will work out. You now have tons of money, and you can probably buy most of the things you want. But then the other questions arise – what do you do with the rest of the money once you have all of the things you wanted? Do you share? Do you spend? Do you invest, save, try to change the word?

Whatever you do with the money will have tax consequences. But there’s another thing to consider: if you know what you would do with the money if you happen to beat the odds – planning ahead can help minimize the tax impact.

 

What are the tax consequences of winning the Powerball? It depends.

The first thing to realize when dealing with the tax consequences of a transaction – especially one involving a windfall – is that it is much better to plan ahead than to react to the situation after the fact. Even once you’ve won the lotto, you should be making a plan for your money going forward.

If you plan to spend your winnings until the money is gone, this post probably isn’t for you. Have a good time and invite some friends along for the ride.  Keep reading to see what you consider before and after you win that $1.5 Billion jackpot (or $4.3 Million if you share. Read more →

Short Sale Debt Forgiveness Tax Relief

Tax Relief for Short Sale Debt Forgiveness

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Short Sale Tax Relief

Exemption for Tax Liability Created by Short Sale Debt Forgiveness

The Budget Bill signed into law by President Obama on December 18th, 2015, has received a lot of coverage in the news for many reasons. One of the good thing hidden in the Bill is that The Mortgage Forgiveness Debt Relief Act, which had expired in 2014, has been retroactively extended through 2016. Let’s take a look at why further relief is necessary when debt is forgiven through short sale.

Debt Forgiveness is a Taxable Event

In this world, very few people are strangers to debt. Whether it is unsecured debt such as credit cards or student loans, or secured debt such as a mortgage on real estate property or car loan, almost everybody owes somebody else money. However, lenders do not always successfully collect debts owed to them. In these cases, the lender may elect to cancel all or part of the debt of the borrower.

With unsecured debt, the lender might not be able to collect the debt or may simply give up on trying to collect. With secured debt, the lender will usually chose to foreclose or repossess the property, or allow a short sale as discussed below.

What many people do not know, is that the forgiveness, discharge or cancellation of debt (whichever term you chose to use), is generally a taxable event. The IRS expects people to pay taxes on the difference between the amount they owed and the amount they actually paid. How does the IRS know? Because the lender is required by Federal Law to file Form 1099-C “Cancellation of Debt”, for any debt forgiveness greater than $600. the 1099-C contains pertinent information such as the borrower and lender identification, amount of debt forgiven and date of discharge. you are then required to show the amount of forgiven debt as income on Form 982 and submitted with your Form 1040 “Income Tax Return”.

How Does Debt Forgiveness Tax Impact Short Sale?

In a Short Sale, the lender allows the property owner and borrower to sell the property for less than they owe, and forgive the remainder of the debt, in an attempt to save themselves the time and cost of foreclosure and property maintenance. Technically, this debt forgiveness would be a taxable event as discussed above.

However, The Mortgage Forgiveness Debt Relief Act shields homeowners from tax liabilities created by mortgage debt that is forgiven due to Short Sale of a principal residence (as well as debt forgiven through mortgage modification or deed in lieu of foreclosure). Up to $2,000,000 of forgiven debt is eligible for tax exclusion.

Is Tax Relief for Short Sale Debt Forgiveness Fair?

Whether the forgiveness is fair or not is up for debate, but it definitely makes sense. People seeking Short Sale to avoid foreclosure do not have the money to pay their mortgage. How can the IRS expect the borrower to pay taxes on money they couldn’t pay? With the great number of financially distressed properties in this housing bubble, they can’t.

Consult a Professional

You need to make sure you are making use of the right professionals so that you do not pay the price at a later date. Your account should be consulted whenever a large scale taxable event occurs; such as the forgiveness of thousands of dollars or more in debt. They will need this information to accurately file your tax return. Your real estate attorney needs to make sure that the lender provides you with a 1099-C that is complete and accurate. Finally, you need to make sure that your team is communicating and exchanging information efficiently.

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