For 2015, the law allows cancellations of a homeowner’s mortgage liability to be excluded from income. Typically, cancelled debt is considered taxable income. Just in time to file your taxes, here are the top 10 tips for those that had a Debt Cancellation in 2015:
1: Loan on your main home: You may be able to exclude the cancelled loan amount from your income. The loan must have been used to buy, build, or substantially improve your main home. In addition, your main home must also secure the mortgage.
2: Loan modification on your main home: If part of your mortgage, through a loan modification or “workout”, was cancelled you may be able to exclude the amount as income. Also, you may be able to exclude debt discharged as part of the Home Affordable Modification Program. The debt cancelled in a foreclosure may also apply for the exclusion.
3: Refinanced mortgage: Amounts cancelled on a refinanced mortgage may apply for the exclusion. However, the proceeds from the refinancing must have been used to buy, build, or substantially improve your main home and is only up to the amount of the old mortgage principle just prior to refinancing.
4: Other types of cancelled debt: Second homes, rental and business property, credit card debt or car loans do not qualify for this exclusion. However, there are other rules that may allow those types of cancelled debts to be nontaxable.
5: Form 1099-C, Cancellation of Debt: This form will be issued to you, by February 1st for the previous tax year, if the lender reduced or cancelled at least $600 of your debt. The form shows the amount cancelled as well as other information.
6: Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness: The excluded debt is reported on this form and is filed with your federal income tax return.
7: IRS.gov – Interactive Tax Assistant: This is a tool on the IRS website that can be used to help you determine if your cancelled mortgage is taxable.
8: Exclusion Extended: The exclusion of cancelled debt from income was extended through December 31, 2016.
9: IRS Free File: IRS.gov/freefile website is the fastest, safest, and easiest way to e-file your tax return for free. You can take advantage of this if you earned $62,000 or less and use a brand name tax software. If you earned more than $62,000, use Free File Fillable Forms that is an electronic version of the IRS paper forms.
10: More Information: If you want to find out more information regarding the taxable impact on cancellation of debt, check out IRS Publication 4681, Cancelled Debts, Foreclosures, Repossessions, and Abandonments.
Tania Quigley, CPA
Tania Quigley has been a member of Cerini & Associates’ audit and consulting practice area for ten years where she focuses on serving the firms nonprofit and employee benefit plan clientele. Tania has experience in performing financial statement audits and reviews, tax return preparation, cost report preparation and filing, retirement plan audits, and other consulting. Tania brings her expertise, diversified background, and helpful approach to all of her engagements.