The annual tax day countdown to April 15 is approaching. Before you file your taxes, make sure you are not paying too much. Many homeowners who have lost their homes in the housing crisis are losing out a second time by overpaying on their Mortgage Forgiveness Debt Relief taxes.
You may have rushed to file for the program before December 31, 2013- California still offers similar programs- only to find a huge tax bill to be paid to the government. What many people don’t know is the cancellation of their debt may be looked at as income earned.
Not all forgiven debt is income earned and unless you tell them that, they may not adjust it and take your money. Excluded cancellation of debt can be claimed on your “Qualified principal residence indebtedness,” says the IRS.gov website, “This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.”
Not just those losing their homes to foreclosure are getting tax bills issued for cancelled debt. Bankruptcies, car repossession, credit card forgiveness, insolvency or business failures can possibly trigger the taxman claiming you owe income taxes.
Anyone who finds themselves liable for taxes for debt that was cancelled can file a simple form from the IRS. When you consult with your tax professional ask them about form 982.
These “Phantom” taxes hit Americans at the worst time possible.The tax code is very complicated and the average person may not know tax law. But remember there is a way out of it.
Oftentimes the creditor sends you, the taxpayer a 1099 stating that you incurred income. It is then up to you and your preparer to clarify the cancellation as non-income tax relief. It is also wise to send a disclosure statement, explaining anything that may become a question to the IRS.
“The problem: Many consumers have no clue what the 1099-C forms are, and some may be trashing the cancellation of debt notices because the forms are sent by creditors or debt collectors with whom they thought they no longer had business,” says Connie Prater from CreditCard.com.
Make sure that all tax documents sent to you are correct. Nina Olson, the head of the IRS’s Office of the Taxpayer Advocate, “warned Congress that financial institutions have issued 1099-Cs for debts they haven’t even tried to collect for some time or have forgiven. Some taxpayers have received duplicate 1099-Cs for the same debt and have found it difficult to reconcile with the IRS.”