Tips About Debt Cancellation
Tips About Debt Cancellation from a Certified Public Accountant:
If your lender cancels part or all of your debt, it is usually considered income and you normally must pay tax on that amount. However, the law allows an exclusion that may apply to homeowners who had their mortgage debt canceled in 2015. Here are 10 tips about debt cancellation:
- Main home. If the canceled debt was a loan on your main home, you may be able to exclude the canceled amount from your income. You must have used the loan to buy, build or substantially improve your main home to qualify. Your main home must also secure the mortgage.
- Loan Modification. If your lender canceled part of your mortgage through a loan modification or “workout”, you may be able to exclude that amount from your income. You may also be able to exclude debt discharged as part of the Home Affordable Modification Program, or HAMP. The exclusion may also apply to the amount of debt canceled in a foreclosure.
- Refinanced Mortgage. The exclusion may apply to the amounts canceled on a refinance mortgage. This applies only if you used proceeds from the refinancing to buy, build, or substantially improve your main home and only up to the amount of the old mortgage principal just before refinancing. Amounts used for other purposes do not qualify.
Other canceled Debt. Other types of canceled debt such as second homes, rental and business property, credit card debt or car loans do not qualify for this special exclusion. On the other hand, there are rules that may allow those types of canceled debts to be nontaxable.
- Form 1099-C. If your lender reduced or canceled at least $600 of your debt, you should receive Form 1099-C, Cancellation of Debt, by Feb. 1. This form shows the amount of canceled debt and other information.
Form 982. If you qualify, report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. File the form with your federal income tax return.
- IRS.gov tool. Use the interactive Tax Assistance tool on IRS.gov to find out if your canceled mortgage debt is taxable.
Exclusion Extended. The law that authorized the exclusion of canceled debt from income was extended through Dec. 31, 2016.
- IRS Free File. IRS e-file is the fastest, safest and easiest way to file. You can use IRS Free File to e-file your tax return for free. If you earned $62,000 or less, you can use brand name tax software. The software does the math and completes the right forms for you. If you earned more than $62,000, use Free File Fillable Forms. This option uses electronic versions of IRS paper forms. It is best for people who are doing their own taxes. Free File is available only on IRS.gov/freefile.
- More Information. For more on this topic see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and abandonments.
For professional tax services from a certified public accountant, please contact Jack McCarty at www.justcalljack.com or 502-327-8009. This is not a free service. Tax work is tough and should be done by a professional. Don’t risk submitting your taxes incorrectly.