Mortgage Debt Forgiveness: 10 Key Points

Issue Number:    IRS Tax Tip 2012-39


Canceled debt is normally taxable to you, but there are exceptions. One of those exceptions is available to homeowners whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012.

The IRS would like you to know these 10 facts 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 does 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 IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments, is also an excellent resource.

You can also use the Interactive Tax Assistant available on the IRS website to determine if your cancelled debt is taxable. The ITA takes you through a series of questions and provides you with responses to tax law questions.

Finally, you may obtain copies of IRS publications and forms either by downloading them from or by calling 800-TAX-FORM (800-829-3676).

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IRS Restricts Tax Return Drop-offs at Assistance Centers

The Internal Revenue Service is taking steps to discourage tax preparers and other taxpayer representatives from dropping off completed tax returns at its local Taxpayer Assistance Centers instead of mailing or electronically filing them.

The IRS said in an email to tax professionals that starting this year, IRS Taxpayer Assistance Centers generally will not accept bulk returns for processing and mailing, particularly when it affects taxpayer services. “The IRS hopes to eliminate the practice of taxpayer representatives dropping off completed returns for processing, especially during peak operating periods,” said the IRS.

The IRS explained that the intention behind the policy change is not to limit assistance to taxpayers or their authorized representatives, nor to limit taxpayer representatives’ visits to support their clients, particularly in situations where the taxpayer is facing financial harm or undue hardship, such as delinquent returns or to start or stop an installment agreement.

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Special Tax Considerations for the Disabled

A tax attorney is warning taxpayers with severe disabilities and their preparers to be careful with how they report lump sum Social Security disability payments on their income tax returns this season.

More than 1 million people with severe disabilities became beneficiaries under the Social Security Disability Insurance program last year, the firm noted. But many of them are likely to improperly report their SSDI payments on their income tax returns.


Up to 50 percent of Social Security disability benefits are taxable each year. The actual amount is determined by adding one-half of the taxpayer’s SSDI benefits to all of his or her other income sources. For 2011, a federal income tax return must be filed if gross income is at least $19,000 for couples filing jointly and $9,550 for individuals.

People who received a lump-sum SSDI payment in 2011 will see this amount included in Box 3 of the Form SSA-1099 they receive from the Social Security Administration. Worksheets provided in IRS Publication 915 and discussed in Allsup’s free online guide, Managing Your Taxes, can be used to determine the taxable portion of a retroactive SSDI payment. However, Gada cautions it can be extremely difficult to do this by hand and recommends seeking help from a knowledgeable tax professional or, at the very least, investing in tax preparation software that covers this.

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Education Tax Credits Help Pay Higher Education Costs

Issue Number:    IRS Tax Tip 2012-37

Two federal tax credits may help you offset the costs of higher education for yourself or your dependents.  These are the American Opportunity Credit and the Lifetime Learning Credit.

To qualify for either credit, you must pay postsecondary tuition and fees for yourself, your spouse or your dependent. The credit may be claimed by either the parent or the student, but not both. If the student was claimed as a dependent, the student cannot file for the credit.

For each student, you may claim only one of the credits in a single tax year. You cannot claim the American Opportunity Credit to pay for part of your daughter’s tuition charges and then claim the Lifetime Learning Credit for $2,000 more of her school costs.

However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your spouse’s graduate school tuition.

Here are some key facts the IRS wants you to know about these valuable education credits:

1. The American Opportunity Credit

  • The credit can be up to $2,500 per eligible student.
  • It is available for the first four years of postsecondary education.
  • Forty percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.
  • The student must be pursuing an undergraduate degree or other recognized educational credential.
  • The student must be enrolled at least half time for at least one academic period.
  • Qualified expenses include tuition and fees, coursed related books supplies and equipment.
  • The full credit is generally available to eligible taxpayers whose modified adjusted gross income is less than $80,000 or $160,000 for married couples filing a joint return.

2. Lifetime Learning Credit

  • The credit can be up to $2,000 per eligible student.
  • It is available for all years of postsecondary education and for courses to acquire or improve job skills.
  • The maximum credited is limited to the amount of tax you must pay on your return.
  • The student does not need to be pursuing a degree or other recognized education credential.
  • Qualified expenses include tuition and fees, course related books, supplies and equipment.
  • The full credit is generally available to eligible taxpayers whose modified adjusted gross income is less than $60,000 or $120,000 for married couples filing a joint return.

If you don’t qualify for these education credits, you may qualify for the tuition and fees deduction, which can reduce the amount of your income subject to tax by up to $4,000. However, you cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.

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$1 Billion Awaits People Who Haven’t Filed 2008 Taxes

Tax refunds amounting to over $1 billion are awaiting an estimated 1 million people who still have not filed a federal income tax return for 2008.

To collect, taxpayers and preparers must file a return with the Internal Revenue Service no later than Tuesday, April 17. The IRS estimated that half of the potential tax refunds are for more than $600.

In some cases, the IRS acknowledged, people may not have filed because they had too little income in 2008 to require filing a tax return, even though they had taxes withheld from their wages or made quarterly estimated payments. In cases where a tax return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim a refund within three years, the money becomes the property of the U.S. Treasury, which could use some extra money to deal with the spiraling budget deficit.

The law requires that 2007 return be properly addressed, mailed and postmarked by April 17. There is no penalty for filing a late return qualifying for a refund.

The IRS also noted that taxpayers seeking a previously unclaimed 2008 refund may still have their refunds held if they have not filed tax returns for 2009 and 2010. In addition, the refund will be applied to any amounts still owed to the IRS, or they may be used to offset unpaid child support or past-due federal debts such as student loans.

By failing to file a return, people stand to lose more than refunds of taxes withheld or paid during 2008, the IRS noted. Some people, especially those who did not receive an economic stimulus payment in 2008, may qualify for the Recovery Rebate Credit.

Current and prior-year tax forms and instructions are available on the Forms and Publications page of or by calling toll-free (800) TAX-FORM (800-829-3676). Taxpayers who are missing Forms W-2, 1098, 1099 or 5498 for 2008, 2009 or 2010 should request copies from their employer, bank or other payer. If these efforts are unsuccessful, taxpayers can get a free transcript showing information from these year-end documents by ordering it on, filing Form 4506-T, or by calling (800) 908-9946.


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Small Businesses Anticipate Bigger Revenues

Small business owners are the most optimistic they have been since July 2008 and expect increased revenues and more hiring this year, according to a new survey by Wells Fargo and Gallup.

The Wells Fargo/Gallup Small Business Index survey for the period Jan. 9-13, 2012 now stands at positive 15 for January, compared to minus 3 in October and following two previous readings of zero, indicating the small business owners surveyed were neither optimistic nor pessimistic.

Forty-nine percent of the small business owners surveyed said they expect revenues to increase a lot or a little, up from 37 percent in the fourth quarter of last year. In addition, 63 percent anticipate their company’s financial situation to be very or somewhat good over the next 12 months, up from 55 percent in the fourth quarter.


In terms of hiring, 22 percent of the respondents expect the number of jobs at their company to increase a lot or a little, up from 15 percent in Q4 2011, while 8 percent expect the number of jobs at their company to decrease a lot or a little, down from 13 percent in Q4.

When asked about cash flow, 53 percent of the surveyed small business owners expect their cash flow to be very or somewhat good this year, up from 48 percent in Q4 2011. In addition 27 percent of the respondents expect credit to be very or somewhat easy to obtain, up from 22 percent in Q4 2011; while 38 percent expect credit to be very or somewhat difficult to obtain, down from 43 percent in Q4 2011.

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Congress Passes Payroll Tax Cut and Unemployment Benefits Extension


Congress passed legislation extending the payroll tax cut, unemployment benefits, and the “doc fix” for Medicare physician reimbursements through the remainder of the year.

The House approved the measure by a vote of 239-132, while the Senate quickly passed the legislation by a 60-36 vote, ahead of a congressional recess that starts this weekend. President Obama is expected to sign it into law before the current two-month extension expires at the end of this month.

The bill, known as the Middle Class Tax Relief & Job Creation Act, extends the 2 percentage point cut in Social Security and Medicare withholding taxes to 4.2 percent. It also extends unemployment benefits through the rest of the year, although the 99-week maximum benefit in some states will be gradually scaled back to 73 weeks

Democratic and Republican negotiators in a congressional conference committee agreed this week to pay for the extension in part through auctions of wireless spectrum, a 2.3 percent increase in pension contributions by new government employees, and health care offsets that fix technical errors and reduce spending on providers and corporations to ensure Medicare patients continue to have access to their doctors.

The agreement includes some reforms to the unemployment insurance program pushed for by Republicans, allowing states to promote the re-employment of unemployed workers through demonstration projects, and to require drug tests, but only for people who were fired for unlawful use of controlled substances. It also creates a national job search standard, covering benefits from beginning to end, and requires the unemployed to look for a job if they receive unemployment benefits, while expanding work-sharing programs to help avoid layoffs in the first place.

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IRS Experiences Further Tax Refund Delay Problems

The Internal Revenue Service has been having more problems with delayed tax refunds.

Early in tax-filing season, the IRS warned that taxpayers who had filed prior to January 26 might see delays of a week beyond the projected date shown in the online “Where’s My Refund” tool.

However, since February 15, the “Where’s My Refund” tool has displayed a message indicating further delays. “We are aware that some taxpayers who have filed electronically and received an acknowledgement from the IRS are concerned when they visit ‘Where’s My Refund’ and are told that we have no information regarding their return,” said an update message on the page five days later. “This is a temporary situation, and we expect to resolve the matter in a few days. At that time, taxpayers will be able to get an expected refund date when they visit ‘Where’s My Refund.’”

 Part of the problem appears to be with the new filters that the IRS installed this tax season to combat identity theft fraud, and which were blamed for causing the delays last month.

The IRS asked taxpayers not to repeatedly call the agency to inquire about their refunds, but apparently many taxpayers are concerned about the delays, especially when they are getting mixed signals from the “Where’s My Refund” tool.

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IRS Offers Tool for Homebuyer Tax Credit Repayment

 The Internal Revenue Service has introduced a new online tool for taxpayers who need to repay their First-Time Homebuyer Tax Credit.

The IRS said that reminder letters would no longer be mailed to taxpayers who have to repay the credit. They can now use the online lookup tool to check on their repayment obligations.

The IRS noted that for taxpayers who bought a home in 2008 and claimed the First-Time Homebuyer Credit, the credit works the same way as a no-interest loan. It must be repaid in 15 equal annual installments beginning with the 2010 return. Anyone who sold their home, or stopped using it as their main home, may have to repay the entire credit whether their home was purchased in 2008, 2009 or 2010.

The First-Time Homebuyer Credit Tool will provide critical account information to help taxpayers report their repayment obligations on their tax returns. To access the tool, taxpayers need to enter their Social Security number, date of birth and complete address. Those filing a joint return will only be able to access their portion of the First-Time Homebuyer Credit account information.

The tool displays the original amount of the credit, annual repayment amounts, total amount paid and the total balance left to be paid. Taxpayers will be able to print their account page to share with their tax preparers and keep for their records.

To repay the First-Time Homebuyer Credit, taxpayers should add the amount they have to repay to any other tax owed on their federal tax return. This could result in an additional tax owed or a reduced refund. To repay the credit, taxpayers report the repayment on line 59b on Form 1040, U.S. Individual Income Tax Return. If they are making an installment payment, they do not need to attach Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, to the tax return. However, if they are repaying the credit because the home stopped being their main home, they must attach Form 5405.

To access the First-Time Homebuyer Credit Lookup Tool, 24 hours a day, seven days a week, visit the Web site.

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Student Loan Debts Could Trigger Next Financial Crisis

A recent survey of U.S. bankruptcy attorneys found a major jump in student loan debtors seeking their help, pointing the way to a possible mortgage-style debt crisis.

Now that state attorneys general across the country have reached a $25 billion deal with the major banks on their investigation into “robo-signing” and other foreclosure abuses, the next financial crisis may be on the horizon, one group is warning.

A survey and report released Tuesday by the National Association of Consumer Bankruptcy Attorneys found that 81 percent of the bankruptcy attorneys polled said that potential clients with student loan debt have increased “significantly” or “somewhat” in the past three to four years. Overall, 48 percent of the bankruptcy attorneys in the survey reported significant increases in such potential clients.

In addition, 39 percent of the bankruptcy attorneys surveyed said they have seen potential student loan client cases jump 25 to 50 percent in the past three to four years. An additional 23 percent of bankruptcy attorneys have seen such cases jump by 50 percent to more than 100 percent.

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