Tag Archives: Debts

Special Exclusion for Cancelled Home Mortgage Debt

If a lender cancels or forgives money you owe, you usually have to pay tax on that amount. But when it comes to your home, an important exception to this rule may apply in 2013.  It is our understanding that this exclusion expired on December 31, 2013 and has not been renewed by congress.  Therefore, as of now, this will not work after tax year 2013.   But if you happened to finalize debt cancellation on your primary home loan prior to January 2014 this may save you from a significant tax bill.  Here are several key facts from the IRS about the special exclusion for cancelled home mortgage debt:

• If the cancelled debt was a mortgage loan on your main home, you may be able to exclude the cancelled amount from your income. To qualify you must have used the loan to buy, build or substantially improve your main home. The loan must also be secured by your main home.

• If your lender cancelled 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. Visit IRS.gov for more details about HAMP. The exclusion may also apply to the amount of debt cancelled in a foreclosure.

• The exclusion may apply to amounts cancelled on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or greatly improve your main home. Proceeds used for other purposes don’t qualify. For example, a loan that you used to pay your credit card debt doesn’t qualify.

• Other types of cancelled debt do not qualify for this special exclusion. This includes debt cancelled on second homes, rental and business property, credit card debt or car loans.

• If your lender reduced or cancelled at least $600 of your mortgage debt, you should receive Form 1099-C, Cancellation of Debt, in January of the following year. This form shows the amount of cancelled debt and other information. Notify your lender if any information on the form is wrong.

• Report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. File the completed form with your federal tax return.

• Whether you use IRS e-File or mail a paper return, you can use the Interactive Tax Assistant on IRS.gov to find out if you must pay tax on cancelled mortgage debt.

For more on this topic, see Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. You can get IRS forms and publications online at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Please feel free to contact Tax On Wheels, LLC at 803 732-4288 if we can assist your with debt cancellation issues.
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Injured or Innocent Spouse Tax Relief

You may be an injured spouse if you file a joint tax return and all or part of your portion of a refund was, or is expected to be, applied to your spouse’s legally enforceable past due financial obligations.

Here are seven facts about claiming injured spouse relief:

1. To be considered an injured spouse; you must have paid federal income tax or claimed a refundable tax credit, such as the Earned Income Credit or Additional Child Tax Credit on the joint return, and not be legally obligated to pay the past-due debt.

2. Special rules apply in community property states. For more information about the factors used to determine whether you are subject to community property laws, see IRS Publication 555, Community Property.

3. If you filed a joint return and you’re not responsible for the debt, but you are entitled to a portion of the refund, you may request your portion of the refund by filing Form 8379, Injured Spouse Allocation.

4. You may file form 8379 along with your original tax return or your may file it by itself after you receive an IRS notice about the offset.

5. You can file Form 8379 electronically. If you file a paper tax return you can include Form 8379 with your return, write “INJURED SPOUSE” at the top left of the Form 1040, 1040A or 1040EZ. IRS will process your allocation request before an offset occurs.

6. If you are filing Form 8379 by itself, it must show both spouses’ Social Security numbers in the same order as they appeared on your income tax return. You, the “injured” spouse, must sign the form.

7. Do not use Form 8379 if you are claiming innocent spouse relief. Instead, file Form 8857, Request for Innocent Spouse Relief. This relief from a joint liability applies only in certain limited circumstances. However, in 2011 the IRS eliminated the two-year time limit that applies to certain relief requests. IRS Publication 971, Innocent Spouse Relief, explains who may qualify, and how to request this relief.

For complete information on Injured and Innocent Spouse Tax Relief, visit IRS.gov or contact Tax On Wheels, LLC at 803 732-4288.

Tax Refunds May Be Applied to Offset Certain Debts

Past due financial obligations can affect your current federal tax refund. The Department of Treasury’s Financial Management Service, which issues IRS tax refunds, can use part or all of your federal tax refund to satisfy certain unpaid debts.

Here are eight important facts the IRS wants you to know about tax refund offsets:

1. If you owe federal or state income taxes, your refund will be offset to pay those taxes. If you had other debt such as child support or student loan debt that was submitted for offset, FMS will apply as much of your refund as is needed to pay off the debt and then issue any remaining refund to you.

2. You will receive a notice if an offset occurs. The notice will include the original refund amount, your offset amount, the agency receiving the payment and its contact information.

3. If you believe you do not owe the debt or you are disputing the amount taken from your refund, you should contact the agency shown on the notice, not the IRS.

4. If you filed a joint return and you’re not responsible for the debt, but you are entitled to a portion of the refund, you may request your portion of the refund by filing IRS Form 8379, Injured Spouse Allocation. Attach Form 8379 to your original Form 1040, Form 1040A, or Form 1040EZ or file it by itself after you are notified of an offset. Form 8379 can be downloaded from the IRS website at www.irs.gov.

5. You can file Form 8379 electronically. If you file a paper tax return you can include Form 8379 with your return, write “INJURED SPOUSE” at the top left of the Form 1040, 1040A or 1040EZ. IRS will process your allocation request before an offset occurs.

6. If you are filing Form 8379 by itself, it must show both spouses’ Social Security numbers in the same order as they appeared on your income tax return. You, the “injured” spouse, must sign the form. Do not attach the previously filed Form 1040 to the Form 8379. Send Form 8379 to the IRS Service Center where you filed your original return.

7. The IRS will compute the injured spouse’s share of the joint return. Contact the IRS only if your original refund amount shown on the FMS offset notice differs from the refund amount shown on your tax return.

8. Follow the instructions on Form 8379 carefully and be sure to attach the required forms to avoid delays. If you don’t receive a notice, contact the Financial Management Service at 800-304-3107, Monday through Friday from 7:30 a.m. to 5 p.m. (Central Time).

Please contact Tax On Wheels, LLC at 803 732-4288 if you need assistance with this or any other tax issue.