Advice welcome-VERY unusual circumstance: lien, NOL

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boglewill34
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Advice welcome-VERY unusual circumstance: lien, NOL

Post by boglewill34 » Wed Nov 22, 2017 10:50 am

Hopefully this is a situation that will be very unique here! I have no regrets, I just want to pull this phoenix out of her fire.

Wife and I both early 40s, both somewhat newly but gainfully employed in the public sector, me for 2.5 years, her for only a couple months. She was between jobs for 4 months prior to getting this job. 3 kids, 8, 10, 10.

I make 55k, which was a promotion in June, and within two months I've also been doing standby/overtime which increases my gross 20%, so roughly 66k. I get 2% cola, and will get roughly 3% step increases each year for 6-7 years. She makes 36k, with basically no adders, but should get 2% cola as well.

We have a home which we've had since 2005, currently owe 205k at 4.875% on a first and 47k at around 5.25% on a heloc. RE taxes total around 6k a year combined. Both mortgages were refi’d around 2015 under a distressed “save your home” type of program. Monthly payments are $1600 on the first including escrow and $400 on the heloc. Interesting thing 1, we have an IRS lien on the house.

Taxes. We owe around 52k from 2012, and around 13k from 2013. This is down around 50% from the high that we owed from other years as well, so making progress. Not currently on repayment, the current "strategy" (probably not the best one) is to use current year withholdings to pay down the taxes in arrears. To help speed this up, we generally claim exemptions of 0 and single to maximize payroll withholding. Leading to the next interesting thing 2.

Interesting thing 2, taxes too. In 2014, I closed a business for which there was almost $1M in unrealized/unrealizable capital account. This turned into NOL, which we’ve carried forward. So since then, all taxes collected in state and federal taxes get “refunded” back to the IRS to apply toward our open balances. Note that all returns were filed, on time. There are just these two years with open and somewhat large balances on them.

The kids all have 529 plans, within the immediate family it’s currently funded enough to pay a year of college for each, and I’ve just now re-set up payroll withholding to contribute a menial amount, like $500 a year each. In addition, my parents have 529s set up for them that I’m not sure of the amount of, but I think more substantial than ours, but conservatively will provide at least another year of university for each.
Credit card debt as follows: 2k on zero percent for a year, 4k on 13%. I’ve got current plans to pay the ones carrying interest within 6 months ($750 a month), and then zero out the zero interest before carrying interest.

Savings, emergency or otherwise, basically zero at this point. We had some that got spent down while wife was on a ~4 month sabbatical. Given at least the stability of my working situation (both objective and subjective), for now I can say I’m basically ok with using all unallocated funds to pay down debt instead of building ES, and using credit to lever against emergency needs. I say MY work situation is stable because I know I’ll stick out public service until retirement, she’s not as committed yet.

Retirement. We are both in a pension tier that will provide 35% of final average salary for life at age 63, and will get a continuation of employment level health coverage in retirement. We are currently not well funded for retirement otherwise. I’ll have a deferred comp (457) set up in December to which I’ll currently contribute 4%, with the intention of increasing these contributions in lock step with cola and step increases. Once I have the account info for this 457, I’ll also roll over an existing 401k I have $10k in that has a REALLY high ER of around 1.3%. She also has an old 401k, I don’t have current paperwork for it but I think that’s around $10k as well, not sure of the ER, etc at this point, but we will roll it over if it’s high.
The AA and ERs of my 457 will be as follows:
• Bond 30% .02%ER
• Large Cap 25% .01%ER
• Small Cap 20% .02%ER
• International 17% .2% ER
• Emerging 8% .99%ER
The overall ER of this portfolio is 0.13%, these were all picked out of the offerings of the plan for the lowest in class ER. Unfortunately, while the domestic offerings are super low ER, the only offerings in international and emerging are orders of magnitude higher. I can post plan offerings in full if there’s interest.

We have no car payments, two cars with 150k miles plus each but run, have shopped insurance on them. Don’t have cable, don’t take lavish vacations (camp locally), have leveraged deals for cell phone plan, don’t dine out much, spend below average on groceries, etc etc.
Other than the plans above of paying off interest bearing consumer debt within 6 months, and all consumer debt within a year, contributing and increasing contributions to 457 to match salary increases, the next plan will be to pay down the taxes more quickly. To that end, I think once the interest bearing cc debts are paid, I’ll take that money and send directly to the IRS. That’ll be $750 a month, in addition to what will already be $1000 a month from payroll withholding.

I MAY opt to instead minimize withholding (claim 9 exemptions or something) and send THAT money instead to the IRS, I think I’ll pay less in interest and penalty that way. After this year, I’ll still have at least 650-700k of that NOL to carry forward, this will only be the 3rd or 4th year that I’ve carried forward that NOL. While reading about it is confusing, it looks like I can carry that loss up to 20 years total.

I guess the questions are, should I be doing something differently with either the taxes or with setting up emergency savings? More generally, is there something I’m missing that I can or should be doing?

My goals are very simple and imo humble. Provide for my kids now, and provide at least a bit of their higher education. Be able to sleep a little better by having less debt. Be able to break bread and hoist a beer near a camp fire with friends and family. Big one, be able to continue to do the same at a retirement age of 63.

Advice or input welcome!

retiredjg
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Re: Advice welcome-VERY unusual circumstance: lien, NOL

Post by retiredjg » Thu Nov 23, 2017 8:50 am

This is mostly a bump.

It might be helpful for you to describe what a NOL is and how it works.

My only question is whether you can afford to contribute to the 457b at this point although I know 4% is not a lot.

Don't worry about the ER of the plan - all are fine except the emerging markets and that is a small portion of the overall plan. It is the overall cost that matters and .13% is fine.

Broken Man 1999
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Re: Advice welcome-VERY unusual circumstance: lien, NOL

Post by Broken Man 1999 » Thu Nov 23, 2017 9:26 am

Could NOL be net operating loss?

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

UncleLongHair
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Re: Advice welcome-VERY unusual circumstance: lien, NOL

Post by UncleLongHair » Thu Nov 23, 2017 10:04 am

I think this is somewhat of an esoteric question and you should probably talk to a qualified CPA to get some advice.

I had a kinda-similar situation about 10 years ago. My father passed away and I settled his estate, which included a huge house and a business that he owned. (Very) long story short I sold both the house and business so that there were substantial tax losses even though we got a little cash from them (had to do with the difference between sales price and stepped-up cost basis).

Again long story short this led to a 6-figure capital loss in the estate, which could be passed to the beneficiaries, me and my siblings. This led to a large tax loss carry forward for us, which we could use to offset income at $3k per year and capital gains.

This is not the same as a NOL as you had in your business, but kind of similar. The tax loss carry forward that we got could be carried forward indefinitely but could not be passed on to our kids. So there is an incentive to use it up. I have after-tax investments in stocks and funds and having this tax loss carry forward was as good as cash, basically I could sell taxable investments at a gain and not pay any tax. It took me about 7 years but I used it all up, which I consider to be a good thing.

My advice would be to talk to a CPA and see what you can do to take advantage of this NOL to help you minimize other taxes, and do so sooner vs later.

retiredjg
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Re: Advice welcome-VERY unusual circumstance: lien, NOL

Post by retiredjg » Thu Nov 23, 2017 10:07 am

Broken Man 1999 wrote:
Thu Nov 23, 2017 9:26 am
Could NOL be net operating loss?
Seems likely, but what happens with it? What does it do?

boglewill34
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Re: Advice welcome-VERY unusual circumstance: lien, NOL

Post by boglewill34 » Fri Nov 24, 2017 8:57 am

Yes, NOL is net operating loss. I basically have a negative income that offsets any positive income until it gets depleted. I basically have enough loss accumulated to offset all income at present levels for the next 7 years. The weird part is that while the IRS "owes" me on the NOL, I owe them for 2012 and 2013 having open amounts.

I've cycled through 3 or 4 different CPAs, all of whom would rather re-litigate the causes leading to the NOL, and whether those numbers are correct, etc, than to issue strategy going forward. I think the big loss ends up looking like a shinier object than the current reality, which is that of a middle class family making average income but having a loss. I settled on a CPA that just does basic tax prep now, and can input the numbers and come up with a return every year that makes sense.

I think what I'm trying to sort out is to what level should I fund retirement or ES while having admittedly smallish consumer debt, but then also having the tax debt that does carry a substantial interest and penalty to carry.

retiredjg
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Re: Advice welcome-VERY unusual circumstance: lien, NOL

Post by retiredjg » Fri Nov 24, 2017 9:54 am

Thanks for the update. I had no idea how to interpret the post without that information.

See if I have this debt right:
  • $52k to IRS at what interest rate?

    $13k to IRS at what interest rate?

    $205k mortgage at 4.875%

    $47k HELOC at 5.25%

    $2k at 0%

    $4k at 13%

Savings/Retirement:
  • $0k Emergency fund

    $20k old 401ks

    ~$2.2k a year to 457b starting

    $1.5k to 529's
First, it appears to me you have this situation well in hand and are very much on your way to being out of debt...in time.

A could of things to consider changing.

1) It appears you have had to "leverage" your CCs a few times, one of which has turned into a 13% interest rate debt - a real obstacle to getting out from under debt. I think it would be better to build up a small emergency fund (maybe $2k) than have to depend on the CCs when things come up. Your two old cars are going to need work. Be prepared for that rather than playing catch up all the time with your credit cards.

2) It seems you are paying off the IRS debt at about $12k a year - no thoughts on that till we know the interest rate. You say "substantial", but let's compare that to your other debts.

3) I think I would reduce your 457b contributions to 1% or 2% till the emergency fund is built up, the CC debt paid, and maybe the HELOC. It does not make sense to me to pay 5.25% on the HELOC when you may not be bringing in 5.25% on the investments. Since you may be getting to deduct the HELOC interest on your taxes, it may almost make sense though.

4) You really can't afford the 529, but I get it. Would you consider skipping this for 2018 and put that money into an emergency fund?

The fact that a pension or two is in the future makes this situation less worrisome. What about SS?

retiredjg
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Re: Advice welcome-VERY unusual circumstance: lien, NOL

Post by retiredjg » Fri Nov 24, 2017 9:56 am

Is there some specific date in the future when you are allowed to refinance that mortgage at a lower rate?

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BL
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Re: Advice welcome-VERY unusual circumstance: lien, NOL

Post by BL » Fri Nov 24, 2017 10:00 am

I certainly don't have any good solutions, but suggest you consider this an emergency, rather than "middle class income" managing a temporary financial downturn. You are living on borrowed money, and this cannot be sustained.

First, I would not consider adding more to 529, even a "menial" amount of 500. Every penny counts when you are in this bind. I would not add to retirement savings at least until you get the high-interest CC paid off. Suggest you put everything possible, after paying minimums, into the highest rate CC to get it done immediately! At 13%, it takes forever to pay it off at regular minimum payments. The 0% CC will probably have similar high rates, so wipe that off ASAP. Then tackle next high-interest debt.

Christmas is coming and many families spend more than they can afford. Get your whole family in on working on this emergency, so that family future is not in jeopardy. Everyone can look for extra jobs to make a bit of cash to help out. Instead of buying presents, make coupons promising time or help with favorite things.

You will have no tax benefits from your 457 contributions so I don't see any advantage in doing this right now. Putting some into a Roth IRA would at least let the contributions serve as an emergency fund. In fact, I hate to suggest it, but cashing in some 401k or 529 if there is no tax or penalty due to NOL, might even be considered.

Another thing I hate to suggest, but may need to be considered is bankruptcy, even though IRS loans probably can't be discharged.

I commend you for working hard to take care of this matter.

retiredjg
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Re: Advice welcome-VERY unusual circumstance: lien, NOL

Post by retiredjg » Fri Nov 24, 2017 10:06 am

BL wrote:
Fri Nov 24, 2017 10:00 am
You will have no tax benefits from your 457 contributions....
Why? Because of the NOL?

Putting some into a Roth IRA would at least let the contributions serve as an emergency fund.
Had not thought of this - might be a very good idea.

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BL
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Re: Advice welcome-VERY unusual circumstance: lien, NOL

Post by BL » Fri Nov 24, 2017 10:12 am

retiredjg wrote:
Fri Nov 24, 2017 10:06 am
BL wrote:
Fri Nov 24, 2017 10:00 am
You will have no tax benefits from your 457 contributions....
Why? Because of the NOL?

Putting some into a Roth IRA would at least let the contributions serve as an emergency fund.
Had not thought of this - might be a very good idea.
I am no expert on NOL, but OP did state that there was no tax due for either state or federal taxes, so my assumption would be that a higher income due to no 457 would also have no tax due.

retiredjg
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Re: Advice welcome-VERY unusual circumstance: lien, NOL

Post by retiredjg » Fri Nov 24, 2017 11:12 am

Makes sense. If correct, I think Roth IRA or Roth 457 (if available) would be the better choice.

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badbreath
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Re: Advice welcome-VERY unusual circumstance: lien, NOL

Post by badbreath » Fri Nov 24, 2017 11:32 am

I would be asking this question over at the http://www.fairmark.com/forum/
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

boglewill34
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Re: Advice welcome-VERY unusual circumstance: lien, NOL

Post by boglewill34 » Fri Nov 24, 2017 11:36 am

Good points here, including considering a Roth instead of the traditional pre tax IRA contribution.

I would no longer consider bankruptcy, as this IRS debt can't be discharged under bk, and we are otherwise solvent.

With the IRS debt, unfortunately I can't log onto my IRS account to get current transcripts, but it looks like I've come to a point where penalty on the unpaid balance is now maxed out, and the "only" interest on these accounts is calculated at the fed rate plus 3%, so the rate is listed at 3-4% currently on these debts.

On a potential refi, my credit is not excellent (shows as around 650 average), and last I checked with the bank they wouldn't touch a refi with the tax lien being in place. I may try again soon, but last time I tried I was basically hung up on by the mortgage officer.

Some are suggesting considering selling off existing retirements accounts to settle the tax debt. I'll consider it but it makes me a little nervous losing out on having some retirement savings in place and compounding. I see the point though, I'll have to consider that further.

retiredjg
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Re: Advice welcome-VERY unusual circumstance: lien, NOL

Post by retiredjg » Fri Nov 24, 2017 12:09 pm

Consider some variation to this theme.

Continue paying the IRS at current rate. If you are paying $12k a year, you'll be done in 5 or 6 years, before your oldest two get into college. If your interest rate really is 3% or 4%, it is a debt worth keeping when you have other debt at a higher rates. If there really is no more penalty, I see no reason to rush this debt except to get the lien off the house.

Do give more consideration to making payments to the IRS rather than letting them keep your tax refund. The way you are doing it now, the government is getting the working benefit of your money all year before it actually becomes the government's money. You are making nothing from that money and in fact, your debt is increasing a little since nothing is going to the debt each month. I'd set up a payment plan for all or part of what you are paying them.

You probably cannot refinance till the lien is gone. But you can get rid of that HELOC that has a higher interest rate.

Open a Roth IRA and put all the new 529 money and all the new 457 money (for which you seem to be getting no tax benefit) into it for the next several years. Call it your emergency fund and invest the first $5k in money market or a short term bond - nothing more aggressive that that.

If you have an emergency, you can take that money (contributions but not earnings) without tax or penalty. If you don't have an emergency, the money can be used for your retirement or for college. Doing this preserves also your Roth space which is currently going to waste each year. In a few years when this mess is behind you, you can invest much or all of the money in the Roth IRA as you would for retirement (if the money will be for retirement).

Taking from Roth requires some record keeping and one more form on your taxes (Form 8606). So keep up how many dollars goes into the Roth IRA and how much comes out if it comes to that.

I would NOT cash in your retirement accounts. If things really turn south, that could be a source of cash rather than/before losing your house.

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BL
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Re: Advice welcome-VERY unusual circumstance: lien, NOL

Post by BL » Fri Nov 24, 2017 12:14 pm

Have you studied the IRS pub on NOL?
https://www.irs.gov/publications/p536#e ... 1000177390

It is probably too late to consider carry-back on the losses, but it wouldn't hurt to talk to IRS immediately to see if there is anything that can be done at this time, since you are paying no tax now while owing a lot for the 2 years before NOL.

Someone mentioned the Fairmark forum, that might be worth a try.

Good advice from retiredjg above.

boglewill34
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Re: Advice welcome-VERY unusual circumstance: lien, NOL

Post by boglewill34 » Fri Nov 24, 2017 1:58 pm

These are some great new things to consider, thank you! I have been looking at the IRS pub that you referenced. I'll have to review and then ask the IRS if I can resubmit the returns to reallocate the NOL to a carryback. Thinking about this somewhat more deeply though, I think the NOL was declared in 2015, and at that time my earliest and in fact largest open balance was 2011, so carrying back to that given the 3 year look back was not an option. Meantime unfortunately this has allowed 2012 and 2013 to carry interest and penalty.

I DO have the option to do Roth within my 457, this does indeed appear to be among the best options given the totality of the situation. I could also consider a Roth conversion, ie converting my current balances (20k) of traditional IRA to Roth and letting those additional taxes burn up my NOL.

Either way, I think most actionable is to work on eliminating CC debt, swing max withholding to instead make payments to the IRS to the tax years currently in arrears, make sure I'm right about penalty no longer accruing and that the interest rate is currently 3-4%, and ease into making contributions to a Roth instead of traditional pre tax IRA, and consider eliminating contributions to the 529s.

retiredjg
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Re: Advice welcome-VERY unusual circumstance: lien, NOL

Post by retiredjg » Fri Nov 24, 2017 2:13 pm

boglewill34 wrote:
Fri Nov 24, 2017 1:58 pm
I DO have the option to do Roth within my 457, this does indeed appear to be among the best options given the totality of the situation.
Roth 457 would be better than traditional 457 since you are getting no (direct) benefit on your taxes. I suppose if you use traditional 457, it simply extends your NOL a few months. But eliminating that HELOC and CC debt is more important than using 457 at all, at least this year and next.

Remember that you would not be able to use Roth 457 for an emergency fund. You can only use Roth IRA for an emergency fund.
I could also consider a Roth conversion, ie converting my current balances (20k) of traditional IRA to Roth and letting those additional taxes burn up my NOL.
You have not mentioned having IRA. You mentioned having $20k in old 401ks. Keep in mind that IRA and 401k are different things.

I had not though of Roth conversions. Considering your low tax bracket and the fact that you can burn up the NOL that way, it could be a reasonable idea.

bsteiner
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Re: Advice welcome-VERY unusual circumstance: lien, NOL

Post by bsteiner » Fri Nov 24, 2017 2:45 pm

The NOL is carried back 2 years unless they waived the carryback.

Tax assessments expire after 10 years unless the government files suit on them. Absent some unusual circumstances, the government usually lets them expire. So the taxpayer has to weigh the inconvenience of the tax liability (including its effect on his ability to borrow) against the possibility that he can run out the clock.

boglewill34
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Re: Advice welcome-VERY unusual circumstance: lien, NOL

Post by boglewill34 » Fri Nov 24, 2017 5:22 pm

I don’t know if it would be a likely occurrence, but fear that the irs would attach my wages before 10 years lapsed would or will probably make me inclined to pay up ASAP.

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welderwannabe
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Re: Advice welcome-VERY unusual circumstance: lien, NOL

Post by welderwannabe » Fri Nov 24, 2017 5:34 pm

I am sure many other will disagree with me, but that is a lot of mortgage debt for your combined salaries. $2,500 per month with the property taxes. What is your equity situation with the home? Have you considered downsizing the home a little and using any equity (if there is any) to help pay back the IRS?
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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