With only 6 weeks or so left in the year, it’s almost time to start organizing your tax information for 2011. Come January, those 1099s, W2s, bank statements, and charitable contribution receipts and will begin filling up your mailbox.
In order to stay on top of things, you’ll need to bone up on your tax research, by checking out the new 2011 Publication 17 available through the IRS in January. The 2010 version was a whopping 295 pages, so be sure to eat your Wheaties first.
The U.S. federal tax laws are anything but easy. Especially if you’ve had a particularly difficult financial year. And you are a homeowner. With a loan looming over your head. Which brings us to an uncomfortable—albeit necessary—topic of discussion:
Mortgage Debt Forgiveness
If your mortgage debt has been partly or entirely forgiven during the tax years 2007 through 2012, you may be eligible for a special tax relief known as the Mortgage Debt Forgiveness:
Under federal law, a creditor is required to file a Form 1099-C whenever it forgives or cancels a loan balance greater than $600. This may create a tax liability for the debtor because the canceled debt is considered “income” for tax purposes.
However, for qualifying loans, The Mortgage Debt Forgiveness Relief Act of 2007 may be the answer you need. Straight from the Internal Revenue Service, here are 10 facts the IRS wants you to know about Mortgage Debt Forgiveness:
1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
2. The limit is $1 million for a married person filing a separate return.
3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
8. Debt forgiven on second homes, rental property, business property, credit cards or car loans do not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.
9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
10. Examine 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 in Box 2 as well as the value listed for your home in Box 7.
For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit the IRS website. . A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments.
You can also use the Interactive Tax Assistant available on the IRS website to determine if the cancellation of debt is taxable. The ITA tool is a tax law resource that takes you through a series of questions and provides you with responses to tax law questions. Taxpayers may obtain copies of IRS publications and forms either by downloading them from the IRS website or by calling 800-TAX-FORM (800-829-3676).
My name is Joni Kerley, real estate agent in Snohomish County. Please give me a call (425-343-4545) regarding your home buying or selling questions.
Photo Credit: Arvind Balaraman; used courtesy of FreePhotos.net