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debt Archives - R. Darren Sanford, CPA, CGMA
May 242014
 
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If your mortgage debt has been partly or entirely forgiven, you may be able to exclude the forgiven debt from your income.  Normally, the amount of debt forgiven by a lender must be reported on your tax return as income.  But because of a special tax relief program, in general, you will not have to report as income mortgage debt on your home that was forgiven or reduced by the lender.  This includes mortgage debt that was forgiven or reduced through a mortgage work-out, short sale or foreclosure.

English: Mortgage debt

English: Mortgage debt (Photo credit: Wikipedia)

 

This tax relief is only available on mortgages taken out to buy, build or improve your home and it is only available for debt that was forgiven in the years 2007 through 2013.

There is also a limit on how much forgiven debt can be excluded from your income.  If you qualify, just fill out Form 982 and attach it to your tax return.  See the instructions for Form 982 for more information, including information on restrictions that apply.

A word of caution though.  Most other kinds of debt are not eligible for this relief, and special rules and limitations apply.  So before you claim this tax relief, check out the details on irs.gov.

For assistance with Form 982 related to reduction of tax attributes and mortgage debt forgiveness, contact me via the form below:

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Disclosure of Material Connection: Some of the links on this blog are “affiliate links.” This means if you click on the link and purchase the item, I might receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”

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Nov 042013
 
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How To Overcome The Obstacles To Retirement

Retirement Unfortunately, the vast majority of people will not have enough money to overcome the obstacles to retirement and they must continue working well into their 70’s. The reasons it is SO hard to save for retirement are the 4 obstacles that are in the way.

inflationThe first obstacle to retirement is inflation. Inflation is the silent income killer. Every one of us can think of multiple examples of inflation, but probably the easiest one to relate to is the price of gasoline. Most of us remember paying less than a dollar a gallon, now it’s $3 or $4 or more, depending on where you live on when you are reading this. But inflation doesn’t just eat into our current income and keep us from saving enough. It also screws up your planning because the cost of living doubles every 10-15 years. Let’s say you think you need $3,000 a month when you retire. Well, because the cost of living will double a couple of times or more, you may really need $6,000 a month when you’re ready to retire and $10,000 or more a month if you retire at 65 and live to be over 80.

The second obstacle to retirement is taxes. Now don’t get me wrong. I’m not a tax evasion kind of guy. I’m just saying that taxes in all their forms eat up over 30% of most people’s income, especially if they have a regular W-2 type of job.

 

Credit Card Picture

The third obstacle to retirement is debt. Because taxes reduce the take-home pay of most Americans, they have to go out and borrow what was taken away by Uncle Sam. Let me give you an example. If you make $50,000 a year, you will lose about $18,000 in various taxes and fees, leaving you with $32,000. But, in your mind you feel you have a $50,000 lifestyle, so you borrow the $18,000 on credit cards, car loans, etc., to get back to $50K. But, now, you have to pay back the debt and that reduces your ability to save for retirement.

The fourth obstacle to retirement is less than ideal cash flow decisions. Because inflation, taxes, and debt reduce your cash flow, now you are in a position of making bad decisions. Maybe you pay some bills late and incur late fees and higher interest rates. Maybe you start getting hit with overdraft fees. And what about ATM’s? If you use an ATM that isn’t branded to your bank, you pay a fee to the hosting bank AND your bank. You could be paying up to $6 or more to access that $20. Not too smart.

Cash Flow

So, briefly, what are the 3 things you can do to beat these obstacles to retirement? The first thing you can do is get your money back from the government which was paid primarily in taxes. The IRS website actually says that 114 Million people overpay their taxes during the year and require a refund when they file their taxes. Also, the IRS says that’s a bad plan. You can adjust your withholding by law and get your money put back into your paycheck during the year. Most people can get an extra $40 per week, or $160 a month. Then, you will want to pay down your debts and as each debt disappears, your cash flow continues to increase.

The second strategy is to legally, morally, and ethically reduce your taxes even further by starting some kind of home based business. By having a home based business, you get more tax deductions than you do as an employee. And, paying less taxes while earning a side income increases your cash flow, helps you get out of debt faster, and gives you much more to save for retirement.

The third strategy is to start shifting your income into good investments. You need to get your money working for money instead of you only trading labor for money. Money doesn’t get tired, it doesn’t call in sick, and investment income is usually taxed less than your wages or even your business income.

Overcoming the obstacles to retirement is possible simply by using smart strategies like income shifting. For more details on income shifting, you can find my 3 FREE videos at www.SimpleSteps2Wealth.com.

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Disclosure of Material Connection: Some of the links on this blog are “affiliate links.” This means if you click on the link and purchase the item, I might receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”

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Sep 162013
 
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Canceled debt arises if you are liable for a debt that is canceled, forgiven, or discharged.   Generally, you will receive a Form 1099-C (PDF), Cancellation of Debt, and must include the canceled debt amount in gross income.   However, certain exclusions and exceptions may apply.   If you receive a Form 1099-C but the creditor is continuing to try to collect the debt, then the debt has not been cancelled and you do not have taxable canceled debt income.

A debt includes any indebtedness whether you are personally liable or liable only to the extent of the property securing the debt.  Cancellation of all or part of a debt that is secured by property may occur because of a foreclosure, a repossession, a voluntary return of the property to the lender, abandonment of the property, or a principal residence loan modification.   If your debt is secured by property and that property is taken by the lender in full or partial satisfaction of your debt, you are treated as having sold that property and may have a taxable gain or loss.  The gain or loss on such a deemed sale of your property is an issue separate from whether any cancellation of debt income associated with that same property is includible in gross income.

You must report any taxable amount of a cancelled debt for which you are personally liable, as ordinary income from the cancellation of debt, on Form 1040 or Form 1040NR and associated schedules, as advised in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals).   You must report the taxable amount of a canceled debt whether or not you receive a Form 1099-C.

One might ask why is canceled debt considered taxable income?  The theory behind the taxation of canceled debt is that there is an economic gain or increase in wealth on the part of the taxpayer.   For example, assume the taxpayer receives a $300,000 loan.   The loan proceeds are not taxed upon borrowing.   Assume further that the lender forgives$200,000 some time in the future.   Taxpayer/debtor “received” $200,000 of wealth without tax consequence.   Lender issues Form 1099-C showing $200,000 of canceled debt income.

IRS will be expecting to see this income on the tax return unless, under Code Section 108, there is an exception.   Canceled debts that meet the requirements for any of the following exceptions or exclusions are not taxable.

Canceled Debt that Qualifies for EXCEPTION to Inclusion in Gross Income:

  1. Amounts specifically excluded from income by law such as gifts or bequests
  2. Cancellation of certain qualified student loans
  3. Canceled debt, that if paid by a cash basis taxpayer, would be deductible
  4. A qualified purchase price reduction given by a seller
  5. Any Pay-for-Performance Success Payments that reduce the principal balance of your home mortgage under the Home Affordable Modification Program

Section108(f)(1) excludes student loan discharge if such discharge is pursuant to a provision of such loan under which all or part of the indebtedness would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.  Professions included in this class are teachers, child care workers, special education teachers and armed forces.  Service cannot be for the institution that issued the loan, however.

Section 108(e)(2) covers loans made in connection with a business.  No income shall be realized from the discharge of indebtedness to the extent that payment of the liability would have given rise to a business deduction.  For example, ABC Co. borrows $1,000 to conduct an advertising campaign.  Since advertising is a deductible business expense, cancellation of the $1,000 debt would not result in recognition of income from debt cancellation.

Canceled Debt that Qualifies for EXCLUSION from Gross Income:

  1. Debt canceled in a Title 11 bankruptcy case
  2. Debt canceled during insolvency
  3. Cancellation of qualified farm indebtedness
  4. Cancellation of qualified real property business indebtedness
  5. Cancellation of qualified principal residence indebtedness

The exclusion for “insolvency” is determined on the basis of the taxpayer’s assets and liabilities immediately before the discharge.  Assets are valued at fair market value.  If there is an excess of liabilities over assets, the difference is the amount of insolvency.

The exclusion for “qualified principal residence indebtedness” provides tax relief on canceled debt for many homeowners involved in the mortgage foreclosure crisis.   The exclusion allows taxpayers to exclude up to $2,000,000 ($1,000,000 if married filing separately) of “qualified principal residence indebtedness.”

Generally, if you exclude canceled debt from income under one of the exclusions listed above, you must reduce your positive tax attributes (certain credits, losses, basis of assets, etc.), within limits, by the amount excluded.  You must file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the amount qualifying for exclusion and any corresponding reduction of certain tax attributes.

If you received a Form 1099-C and the information is incorrect, contact the lender to make corrections.

There is a great deal of information regarding cancellation of debt income which is misunderstood.  Be sure to contact a professional who is knowledgeable in this area.

For more information regarding taxability of canceled debt, how to report it, and related exceptions and exclusions, complete the form below.

Disclosure of Material Connection: Some of the links on this blog are “affiliate links.” This means if you click on the link and purchase the item, I might receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”

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