Info about mortgage debt forgiveness and taxes.

[jakiesdad]

I had received a form 1099-C from BofA after a 2nd mortgage debt forgiveness from them. While doing my taxes I was concerned that I would then be stuck with the tax bill on the amount that was wrote off. My attorney who has been great thru out all of this advised he wasn't a tax expert but thought that either under the Mortgage Debt Forgiveness Act or the fact that during the time of debt forgiveness we are insolvent due to being in a Chpt 13 we should not have to claim it as income, but he recommended we contact a tax advisor.
I have been doing my taxes online thru H&R these last few years seeing that it is cheaper and I am limited to the amount I can keep for my yearly return, what's a few refund dollars not found as long as the return is at least the amount I get to keep. Last I heard H&R Block charges over $300 to walk in compared to my $29 program.

I did contact a H&R tax representative thru the program and they emailed me back stating this;
Yes, you will not use the bankruptcy exclusion due to the fact you bankruptcy has not been finalized. You may use the insolvency exclusion. If you are considered insolvent, this will be reflected on form 982 and will not be reported on line 21 of form 1040.

Best regards,

This makes sense to me but the back of my mind is telling me to maybe fork out some money and go see an actual tax advisor, I would hate to be stuck with a $13K tax bill while in the middle of a 13!
Does it make sense to others or has anyone been thru this yet? Any comments would be appreciated and Thank U in advance.

[tobee43]

welcome to the forum!

you have the basic correct information. however, i would still use a tax profession, just to make certain you fill out the 982 correctly.

yes, the mortgage debt relief act is in effect and you may not be discharged from you bk but you have filed under bk protection, so you should fall under the category of insolvent, to make certain, i would seek someone in the tax field . remember these tax 1099's are, the majority of time, really more for the purpose of the creditor letting the irs know what loss they will be claiming not so much that it's added to your income, although in certain situations gains are realized.

many have gone through this, lenders and or creditors have 3 years to issue you a 1099A or C...so many times they will pop up when you least expect them. however, there are usually no tax ramifications attached to the loss, you just want to make sure.

here's a bit more on the explanation:

"If you have received a 1099-C, you need to file IRS Form 982 to demonstrate to the IRS that it is not taxable. While it seems complicated, it is very simple with regard to consumer debt discharged in bankruptcy, and even do-it-yourself tax filers should be able to do it. You just need to check box 1a on the form (“Discharge of indebtedness in a title 11 case” — “Title 11″ being the Bankruptcy Code, not to be confused with Chapter 11, which is just one type of case under Title 11).
You then list the amount discharged on line 2, and then list it again on Line 10a to reduce the basis in your property. However, only list it on 10a to the extent the basis (generally, the purchase price) of the non-depreciable property that you retain after discharge exceeds the debt remaining after your discharge (which includes both existing mortgages and loans secured by property you still own and any non-dischargeable debt). This reduction in basis can result in capital gains tax liability in later years, but because of the residential capital gains exclusion, for most people it has no effect.

This “reduction in attributes” can be more complicated for business debt: for that, you should to consult your tax advisor.

Why is it that these forms are issued? The idea that cancellation of indebtedness is income is pretty simple, and is designed to avoid what could otherwise be a great way to defraud the IRS: instead of getting paid money that would be income, you could “borrow” the money (because a loan is not income), and then have the “lender” just write off the “loan”. To avoid this scam, the tax law generally treats cancellation of debt as income.

To avoid creating phantom income when there is no scam, but legitimate debt cancellation for non-fraudulent reasons, there are certain exceptions to the treatment of cancellation of indebtedness as income. The most important for consumers are (a) discharge in bankruptcy; (b) insolvency; and (c) qualified principal residence indebtedness.

• Debt discharged in bankruptcy is simply not income for cancellation of indebtedness purposes.
• Debt cancelled to the extent of a taxpayer’s insolvency is not treated as taxable income. Generally speaking, this means that if all of your liabilities exceed the fair value of all of your assets (including exempt assets and retirement plans), cancellation of indebtedness up to the amount by which you are insolvent is not taxable (once rendered solvent, the balance would be taxable).
• Finally, through the end of 2012, cancellation of secured loans used to buy, build or substantially improve your principal residence, or to refinance loans incurred for those purposes, is not taxable.

Even though cancellation of indebtedness may not be taxable, the law in many cases requires, or permits, creditors to issue Form 1099-C to report that cancellation to the IRS. The IRS regulation (26 C.F.R. 1.6050p-1(a)(3)) states “Except as otherwise provided in this section, discharged indebtedness must be reported regardless of whether the debtor is subject to tax on the discharged debt under sections 61 and 108 or otherwise by applicable law.” In other words, the fact that you get a 1099-C from a creditor does not mean that you owe tax on the money shown on the form. That is the reason for the Form 982.
There are exceptions to reporting. In particular, where a debt is discharged in bankruptcy, the IRS does not require issuance of a 1099-C unless it was incurred for business or investment purposes. Cancellation or discharge of consumer debt in bankruptcy need not be reported on a 1099-C. But it can be.

A few words of caution: if the debt, or part of it, was canceled before you filed bankruptcy (through debt settlement or negotiation, for example), the creditor must issue the 1099-C unless another exception applies. And that debt is not included on Line 1a of Form 982, because it was not discharged in bankruptcy. As a result, even if you later file bankruptcy, you may owe tax on that debt cancellation income unless you were insolvent at the time you settled it.'

hope that helps a bit

[catleg]

I believe you would file the IRS form 982 with the qualified principal residence exclusion checked (1e).

[tobee43]

I believe you would file the IRS form 982 with the qualified principal residence exclusion checked (1e).

right you are! i have to learn to downsize my words LOl!! good to see you cat!

[jakiesdad]

Thank you for a the responses. Today I stopped by a local non-chain tax advisors office and talked with them for a minute. I decided to make an appointment with them after they said they had experience with 1099-C and Chptr13 filings. And the bonus was they said it would definitely cost me under $300 for them to file.
With the penalty so large if I mess up on any little thing I figure it is well worth it. Kinda like when I decided on my lawyer for our 13, he cost a little more but was well recommended and he did a great job working with us and almost into our 3rd year he is still answering my e-mails and phone calls right away.

[jakiesdad]

By the way Thank U for the welcome, I have been lurking since before we filed our 13 and info from this forum is what helped me in making the decision to file and finally stop the avalanche of financial debt and problems we had got our selves into. Things have been moving along better then we would have expected and I have been wanting to post some of our experience and advice but also have a little bit of superstition if I talk to much about how good something is then it is bound to have an about face on me.
Maybe once I feel free and clear of this tax situation I might post a little more. Thanx again!

[tobee43]

i know a few with that type of superstition ..actually me, i waited and lurked over 2 years before diving in. i wanted to wait until it was all over before chiming in.

but asking questions is good so don't hesitate to continue to ask! collectively we have some great people on this forum with a vast amount knowledge and here to help one thing i have learned on this forum there is no hurdle to high!