Normally, debt that is forgiven is taxable income reported to you on IRS Form 1099, and needs to be included on your tax
return. The new law excludes tax on debt that is forgiven due to either the modification of mortgage terms, or due to a foreclosure
on a principal residence. This tax relief applies only to debt used to buy, build or substantially improve one's principal residence.
Do all mortgages qualify for this tax relief?
No. Tax relief is provided on original mortgages. It is also provided on refinances
up to the principal outstanding at the time of refinance. If you took out additional funds for purposes other than "to buy, build
or substantially improve your principal residence", that amount exceeding the old principal balance would not qualify for this tax
relief.
What tax years are covered under this law?
At the present time, years 2007 through 2012 are covered by this relief provision.
If
my debt does not qualify under this act, is there additional tax relief that may be available?
Maybe. Other relief may be available
to the extent that you are “insolvent” [The extent your liabilities exceed your assets]. Also, debt discharged in Title 11 bankruptcy
is also not subject to tax. However, the debt forgiveness is reported to the IRS and should be properly disclosed on your tax return.
Are
there any special tax papers associated with the mortgage debt forgiveness?
Yes. The debt forgiven will be reported to you and to the
IRS by your lender on Form 1099-C. In order to get the tax benefit of this act, you will need to submit IRS Form 982 with your
regular income tax filing.
How are credit card and other personal debt forgiveness treated for tax purposes?
Terribly! You may find yourself in worst shape than before the debt forgiveness. The forgiven debt is treated as taxable income.
Federal, state and local income taxes, plus interest and late payment penalties can total as much or more thanthe original debt. And
the penalties and interest keep growing just like that on the original credit card balance.
If you were "insolvent" at
the time of your debt forgiveness, you may be able to avoid this tax. To be considered insolvent, your liabilities must exceed
your assets. In this case, you will need to report the debt forgiven on your tax filing, but won't have to pay tax on it. Be prepared
to prove your financial situation if attempting use this technique to escape the tax man.
