I have been trading online for close to 5 years now. When I was looking for an online broker I looked at many different variables. How easy was it to trade? Was there a minimum deposit required to open an account? What were the trading fees? I wanted to get into stock trading, but I didn’t want to have to invest large amounts of money.

The online broker I eventually chose was Firstrade.com. I have been with them for many years now and have been very happy. They are easy to use and have no minimum deposit requirements. And the commissions are low. Currently just $6.95 per trade.

The old adage is to buy low and sell high. This may be a good time to buy stock. Be sure to do your research and start small until you can some skill and knowledge.

It was my difficult job to tell them, that in the eyes of the IRS, debt forgiveness is taxable income.  When you have a loan for $200,000 and the lender lowers that to $175,000, the IRS treats that as income. From their perspective, it is just the same as earning $25,000 and using it to pay down your debt.  My clients were very unhappy when I told them, that only were they not going to get a refund, they now owed the IRS several thousand dollars because of their debt forgiveness.  Talk about kicking someone when they are down!

With the current mortgage crisis, many lenders are working with mortgage holders to restructure loans, and they are forgiving  part of the principal due.  It this housing market it can make a lot of sense. It is better to lose some debt repayment, then to foreclose and get stuck with a house the bank can’t sell.

The IRS has decided to help out homeowners, and for tax years 2007, 2008, and 2009, homeowners will not be required to pay taxes on certain debt forgiveness on mortgages.  If you think this will apply to you, make sure to talk with your tax preparer.  Certain forms must be filled out, and not all home debt will qualify.

Here are some more details from the IRS.

There is now tax relief for struggling homeowners. If your mortgage debt is partly or entirely forgiven during 2007, 2008 or 2009 you may be able to claim special tax relief by filling out Form 982 and attaching it to your federal income tax return for that year.

Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude from tax up to $2 million of debt forgiven on your principal residence. The limit is $1 million for a married person filing a separate return.

Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. The debt must have been used to buy, build or substantially improve your principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available. See Form 982 for details.

If your debt is reduced or eliminated you will receive a year-end statement (Form 1099-C) from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.

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

For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit the IRS Web site at IRS.gov. A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. This publication and Form 982 can be downloaded from IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Remember that for the genuine IRS Web site be sure to use .gov. Don’t be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov.

Links:

• IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments (PDF)
• Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (PDF)

Have you filed your 2007 tax return, (even if you don’t normally file),  waited at least 6 weeks, yet you still haven’t received your stimulus payment? It sure could come in handy this time of year!  What should you do?

First, check this Stimulus Payment Calculator to make sure you qualify. Some of the reasons you might not qualify are covered in this post,  Where’s My IRS Stimulus Payment?.  If all these things check out, it could be that you are one of the 279,000 taxpayers who had their stimulus payment check returned by the US Postal Service.  Apparently, IRS stimulus checks worth over $163 million have been returned by the postal service as being undeliverable.  That is in addition to the $103 million in refund checks that were returned.

If you think you might be one of those 279,000 taxpayers who’s check was returned by the postal service you need to update your address right away.  The stimulus checks must be sent before December 31, 2008. The IRS is recommending that you update your address by November 28, 2008 to insure that they receive their stimulus payment.  You can update your address by filing form 8822.  You only need to file the form one time and the IRS will send both your stimulus payment and any tax refunds that you are due.

But what happens if you are too late, and you don’t get your stimulus payment this year, are you out of luck?  The good news is that if you qualify for the IRS economic stimulus payment, and you don’t get it this year, you can take it as a credit on your 2008 income tax return that you will file in early 2009.

Table of contents for Debt Free Forever

1. How To Get Out of Debt and Become Debt Free Forever
2. Debt Free Forever - Adding Up The Debt
3. Debt Free Forever - The Credit Card Pay Off Plan

This is the third post in a series that will explore how you can become debt free, and stay debt free forever. Future posts will talk about when you should and should not use credit cards for purchases. Why you should care about your credit score, how to save money on every day expenses, will credit repair companies help you or hurt you and much more. Make sure to subscribe to our feed so you don’t miss a single installment of this series.

Make sure you have read parts one and two of the series before reading this.  You also need to have done the previous assignments before you can start paying off your debt.

Now, in part 2 you filled out a worksheet that listed all your credit cards, the amount you owed, the minimum payments on your credit card, and the amount you are actually paying.   Hopefully you are paying more than your total minimum payments each month. If you are paying only your minimum payments, or if you are not even paying your minimum payment, we will need to get into some advanced strategies. I’ll save those for the next post.  But I have found that most people who want to pay off their credit cards,  pay more than their minimum payment each month, sometimes quite a bit more! But this can cause problems.

What I see happen is, some people are so determined to pay off their credit cards, that they put every extra dollar into credit card payments. Then, when something comes up, (and you know something always comes up!) they don’t have the cash and have to pay for the unexpected expense with their credit card.  The other thing that happens is people get tired of living frugally and not having any fun.  If every extra penny is going to paying off the credit cards, eventually you are going to rebel and go on a mad spending spree! It is important to be able to treat yourself every once in awhile. For most people it will take a few years to completely pay off the credit cards. You need to be able to treat yourself occasionally.

So, back to the worksheet.  Take a look at your total required minimum payment, and the amount you are actually paying each month, and find the difference between the two. Hopefully, the amount you are paying on your credit cards each month is at least $15 more than all minimum payments.  This amount will be your debt repayment amount each month. Even though your minimum payments will go down, the total amount you pay on your credit card debt will not change.

The One Third Plan

Here is where we get down to business. I like to call my plan the one third plan.  Take whatever amount you are paying over the minimum payments and divide by three.  One third will go into savings, one third will be an “extra” payment on your credit cards, and one third will be your fun money. You can spend it on anything you like, without any guilt.  You can save up your fun money and buy something big (my husband bought a motorcycle with fun money), or you can use it for little treats here and there. (I spent my fun money on lattes and magazines.)

Fun Money Is Important

Now if you are really anxious to pay off your credit cards you might think you should skip the fun money. DON”T DO IT! The fun money is very important. It will help you get over feeling guilty about spending money. If you stick to the plan you will be paying off your credit cards and growing a savings account, so it is OK to have a little fun!

You Need a Savings Account

The savings account is also very important. It doesn’t matter how small the amount is, you must put something into savings every month. This money is not to be touched, except for “those things that come up”.  These are things that you NEED, that othewise you would have to use your credit card. So, when you car needs repair, or your air conditioning gives out in the middle of summer you can use this money. Later we will talk about how to budget for all those things that come up.  But for right now you need to work on your savings account.

For your extra credit card payment you have to decide what type of person you are. Most credit card pay off plans will tell you to put your extra payment to the card with the highest interest rate. This will maximize your interest savings, and you will pay off your credit cards quicker this way…if you stick with the plan. However, I find most people are able to stick to the plan better if they acomplish smaller goals along the way. I usually suggest people put their extra payment to the credit card with the smallest balance. There is quite a bit of satisfaction in seeing a card with a zero balance!  With either method, once you pay off a credit card, the amount you were paying on that card gets added to the payment for the next card you are working to pay off.  (This is often called the snowball method of paying down credit cards.)

When You Get Extra Money

Now, from time to time you will get extra money.  Tax refunds, a raise at work, a gift from Grandma, any extra money you get needs to have the one third rule applied.  One third will go to savings, one third will be an extra payment on your credit card debt, and one third is fun money.Do this every time you get extra money and you will really accelerate your debt repayment and grow your savings account.

Assignment #3

This is the hardest assignment, but also the most important. From now on you must vow to pay cash for everything. If you don’t have the cash, you can’t buy it. You will be surprised what you can live without! In my next post we will talk about where to find extra money, for those people who are not paying more than the minimum payment.

The news media is busy feeding the flames of panic. I quit watching. I just couldn’t stand another breathless, busty  blond, eyes wide with excitement, telling me about the future horrors if the current crisis is allowed to continue without someone doing something.  Oh yes honey, the horrors. You probably won’t be able to get a new Lexus this year!  You might even have to go to only once a week manicures! Whatever will we do! And what really gets my goat is the amnesia the media seems to have.  It doesn’t seem all that long ago that the crisis was rapidly rising oil prices. Yesterday it was reported that adding to the crisis, is the rapidly falling price of crude oil. Hmmm?  Seems to me that should be a good thing.  I certainly don’t mind that it is costing me $5 less to fill up my tank than it did just a few months ago.

I’d like to inject just a little bit of sanity into the mix.

Yes the stock market is plummeting.  What this means is if you sell your stock right now you are not making a very wise decision.  The idea is to buy low and sell high.  Not buy high and sell low. (Which seems to be what most people do.)  If you are thinking of buying stock right now, and holding it for the long term, then you have the better idea.  I would wait a few days to make sure the free fall has stopped.  Then look for the stock of companies that are financially sound. I would especially look at companies that provide basic goods are services, as oppposed to companies that sell luxury items.

Yes, the credit markets have tightened up.  The news media is reporting as if this is a bad thing.  It is a bad thing for banks and lenders.  They won’t be able to collect super high interest rates and fees from people that probably shouldn’t have gotten a loan in the first place.  Yes, companies that were running on ever extending credit lines and bad business practices are probably going to go under. The truth is, they were going to fail eventually, this way they fail with a little less debt.  But I don’t think it is such a terrible thing for your average person.  Maybe you can’t go on that vacation, or buy that new furniture. You can work on paying down your current debt instead.  If you are someone who has been using credit for daily living expenses, well now it is time to learn how to live within your means. I have worked with  people from all income levels on getting rid of debt, and I can say with certainty, If you live in the US you probably have many places you can cut expenses, without seriously impacting your way of life.

And you can still get a mortgage these days.  You just can’t get a subprime mortgage. You just have to have a decent credit score, put 10% down, and have no more than 40% of your income go to debt repayment.  In other words, you have to have the savings and income to be able to repay the debt! That is not so bad.  I remember a time when you needed a 20% down payment, and your total housing costs (principal, interest, taxes and insurance) were to be around 25% of your monthly income.

And finally, the housing market. if you own your own home, and you can afford your mortgage, don’t worry about the housing market. Don’t try to sell your home and it won’t matter to you. If you are looking to buy a home and you have decent credit, well then now is the time to get excited!  You should be able to find some bargains out there.   But, if you are trying to sell your house right now,  I am sorry to tell you that you will not be able to get the  inflated rates of the past. the crazy hot sellers market is gone and we are now in a buyers market.  Not only that, people can’t get mortgages for overpriced houses anymore.   If you want the biggest market for your home you will price it so the average upper middle class family can purchase your home with a conventional 30 year mortgage. The other buyers you will find are real estate investors who are looking for a bargain. If you paid too much for your house a few years back, you are going to take a loss. My advice, talk to your tax advisor and consider turning your house into rental property. Then in a few years you can sell at a loss and write some of it off your taxes.

So, despite what the news media would have you believe it is not all doom and gloom for the average American. Sure things are going to be tough for awhile, some people are going to lose their jobs when shaky companies fail, some people are going to have trouble selling the houses that they can’t afford. But I think in the long run, the people of this country are going to be in a better place financially. They will have learned that we can survive without excessive consumerism. (The environment will thank you also!) People will have leaned to live within their means, and for those who have cash or good credit, there will be some amazing bargains in housing, stock, and luxury items.

What do you think? Tell me really, how is this crisis directly affecting you?