If your lender cancels part or all of your debt, it is usually considered
income and you normally must pay tax on that amount. However, the law allows an
exclusion that may apply to homeowners who had their mortgage debt cancelled in
2015. Here are 10 tips about debt cancellation:
1. Main Home. If the cancelled debt was a loan on your
main home, you may be able to exclude the cancelled amount from your income.
You must have used the loan to buy, build or substantially improve your main
home to qualify. Your main home must also secure the mortgage.
2. Loan
Modification. 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, orHAMP. The exclusion may
also apply to the amount of debt cancelled in a foreclosure.
3. Refinanced
Mortgage. 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 substantially improve your main home and only up to the amount of the
old mortgage principal just before refinancing. Amounts used for other purposes
do not qualify.
4. Other
Cancelled Debt. Other types of cancelled debt such as second homes,
rental and business property, credit card debt or car loans do not qualify for
this special exclusion. On the other hand, there are other rules that may allow
those types of cancelled debts to be nontaxable.
5. Form
1099-C. If your lender reduced or cancelled at least $600 of your
debt, you should receive Form 1099-C,
Cancellation of Debt, by Feb. 1. This form shows the amount of cancelled debt
and other information.
6. Form 982. If
you qualify, report the excluded debt on Form 982, Reduction of
Tax Attributes Due to Discharge of Indebtedness. File the form with your
federal income tax return.
7. IRS.gov
Tool. Use the Interactive Tax Assistant tool
on IRS.gov to find out if your cancelled mortgage debt is taxable.
8. Exclusion
Extended. The law that authorized the exclusion of cancelled debt from income
was extended through Dec. 31, 2016.
9. IRS Free
File. IRS e-file is
fastest, safest and easiest way to file. You can use IRS Free File to
e-file your tax return for free. If you earned $62,000 or less, you can use
brand name tax software. The software does the math and completes the right
forms for you. If you earned more than $62,000, use Free File Fillable Forms.
This option uses electronic versions of IRS paper forms. It is best for people
who are used to doing their own taxes. Free File is available only onIRS.gov/freefile.
10. More
Information. For more on this topic see Publication 4681,
Canceled Debts, Foreclosures, Repossessions and Abandonments.
Each and every
taxpayer has a set of fundamental rights they should be aware of when dealing
with the IRS. These are your Taxpayer Bill of Rights.
Explore your rights and our obligations to protect them on IRS.gov.
Additional IRS
Resources:
·
Tax Topic 431 -
Canceled Debt – Is It Taxable or Not?
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