If your lender cancelled or forgave your mortgage debt, you generally have to pay tax on that amount. But there are exceptions to this rule for some homeowners who had mortgage debt forgiven in 2012.
Here are 10 key facts from the IRS about mortgage debt forgiveness:
- Cancelled debt normally results in taxable income. However, you may be able to exclude the cancelled debt from your income if the debt was a mortgage on your main home.
- To qualify, you must have used the debt to buy, build or substantially improve your principal residence. The residence must also secure the mortgage.
- The maximum qualified debt that you can exclude under this exception is $2 million. The limit is $1 million for a married person who files a separate tax return.
- You may be able to exclude from income the amount of mortgage debt reduced through mortgage restructuring. You may also be able to exclude mortgage debt cancelled in a foreclosure.
- You may also qualify for the exclusion on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or substantially improve your main home. The exclusion is limited to the amount of the old mortgage principal just before the refinancing.
- Proceeds of refinanced mortgage debt used for other purposes do not qualify for the exclusion. For example, debt used to pay off credit card debt does not qualify.
- If you qualify, report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Submit the completed form with your federal income tax return.
- Other types of cancelled debt do not qualify for this special exclusion. This includes debt cancelled on second homes, rental and business property, credit cards or car loans. In some cases, other tax relief provisions may apply, such as debts discharged in certain bankruptcy proceedings. Form 982 provides more details about these provisions.
- If your lender reduced or cancelled at least $600 of your mortgage debt, they normally send you a statement in January of the next year. Form 1099-C, Cancellation of Debt, shows the amount of cancelled debt and the fair market value of any foreclosed property.
- Check your Form 1099-C for the cancelled debt amount shown in Box 2, and the value of your home shown in Box 7. Notify the lender immediately of any incorrect information so they can correct the form.
Use the Interactive Tax Assistant tool on IRS.gov to check if your cancelled debt is taxable. Also, see Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments.
The term “capital asset” for tax purposes applies to almost everything you own and use for personal or investment purposes. A capital gain or loss occurs when you sell a capital asset.
Here are 10 facts from the IRS on capital gains and losses:
- Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. Capital assets include your home, household furnishings, and stocks and bonds that you hold as investments.
- A capital gain or loss is the difference between your basis of an asset and the amount you receive when you sell it. Your basis is usually what you paid for the asset.
- You must include all capital gains in your income.
- You may deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of personal-use property.
- Capital gains and losses are long-term or short-term, depending on how long you hold on to the property. If you hold the property more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.
- If your long-term gains exceed your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a ‘net capital gain.’
- The tax rates that apply to net capital gains are generally lower than the tax rates that apply to other types of income. The maximum capital gains rate for most people in 2012 is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of their net capital gains. Rates of 25 or 28 percent can also apply to special types of net capital gains.
- If your capital losses are greater than your capital gains, you can deduct the difference between the two on your tax return. The annual limit on this deduction is $3,000, or $1,500 if you are married filing separately.
- If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they occurred that year.
- Form 8949, Sales and Other Dispositions of Capital Assets, will help you calculate capital gains and losses. You will carry over the subtotals from this form to Schedule D, Capital Gains and Losses. If you choose to work with us and e-file your tax return, the professionals here at NFS will do this for you automatically.
Protecting taxpayers and their tax refunds from identity theft is a top priority for the IRS. This year the IRS expanded its efforts to better protect taxpayers and help victims dealing with this difficult issue.
When your personal information is lost or stolen, it can lead to identity theft. Identity thieves sometimes use your personal information to file a tax return to claim a tax refund. Then, when you file your own tax return, the IRS will not accept it and will notify you that a return was already filed using your name and social security number. Often, learning that your return was not accepted or receiving a contact from the IRS about a problem with your tax return is the first time you become aware that you’re a victim of identity theft.
How to avoid becoming an identity theft victim.
- Guard your personal information. Identity thieves can get your personal information in many ways. This includes stealing your wallet or purse, posing as someone who needs information about you, looking through your trash, or stealing information you provide to an unsecured website or in an unencrypted email.
- Watch out for IRS impersonators. Be aware that the IRS does not initiate contact with taxpayers by email or social media channels to request personal or financial information or notify people of an audit, refund or investigation. Scammers may also use phone calls, faxes, websites or even in-person contacts. If you’re suspicious that it’s not really the IRS contacting you, don’t respond. Visit our Report Phishing web page to see what to do.
- Protect information on your computer. While preparing your tax return, protect it with a strong password. Once you e-file the return, take it off your hard drive and store it on a CD or flash drive in a safe place, like a lock box or safe. If you use a tax preparer, ask how he or she will protect your information.
How to know if you are, or might be, a victim of identity theft.
Your identity may have been stolen if the IRS notifies you that:
- You filed more than one tax return or someone has already filed using your information;
- You owe taxes for a year when you were not legally required to file and did not file; or
- You were paid wages from an employer where you did not work.
Respond quickly using the contact information in the letter you received from the IRS so that we can begin to correct and secure your tax account.
If you think you may be at risk for identity theft due to a lost or stolen purse or wallet, questionable credit card activity, an unexpected bad credit report or any other way, contact the IRS Identity Protection Specialized Unit toll-free at 1-800-908-4490. The IRS will then take steps to secure your tax account. The Federal Trade Commission also has helpful information about reporting identity theft.
If you have information about the identity thief who used or tried to use your information, file a complaint with the Internet Crime Complaint Center.
For more information – including how to report identity theft, phishing and related fraudulent activity – visit the Identity Protection home page on IRS.gov and click on the Identity Theft link at the bottom of the page.
IRS Works to Protect Taxpayer Refunds, Detect and Resolve Identity Theft Cases
The IRS takes identity theft-related tax fraud very seriously and realizes that identity theft is a frustrating process for victims. By late 2012, the IRS assigned more than 3,000 employees — more than double from 2011 — to work on identity theft-related issues.
The IRS continues to enhance its screening process to stop fraudulent returns. During 2012, the IRS protected $20 billion of fraudulent refunds, including those related to identity theft, compared with $14 billion in 2011.
The IRS recently announced that a year-long nationwide focus on tax refund fraud and identity theft has resulted in more than 100 arrests in 32 states and Puerto Rico. In January 2013 alone, the IRS targeted 389 identity theft suspects resulting in 734 enforcement actions. To learn more, see IRS Intensifies National Crackdown on Identity Theft on IRS.gov.
The IRS receives thousands of reports every year from taxpayers who receive emails out-of-the-blue claiming to be from the IRS. Scammers use the IRS name or logo to make the message appear authentic so you will respond to it. In reality, it’s a scam known as “phishing,” attempting to trick you into revealing your personal and financial information. The criminals then use this information to commit identity theft or steal your money.
The IRS has this advice for anyone who receives an email claiming to be from the IRS or directing you to an IRS site:
- Do not reply to the message;
- Do not open any attachments. Attachments may contain malicious code that will infect your computer; and
- Do not click on any links in a suspicious email or phishing website and do not enter confidential information. Visit the IRS website and click on ‘Identity Theft’ at the bottom of the page for more information.
Here are five other key points the IRS wants you to know about phishing scams.
- The IRS does not initiate contact with taxpayers by email or social media channels to request personal or financial information;
- The IRS never asks for detailed personal and financial information like PIN numbers, passwords or similar secret access information for credit card, bank or other financial accounts;
- The address of the official IRS website is www.irs.gov. Do not be misled by sites claiming to be the IRS but ending in .com, .net, .org or anything other than .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on their site and report it to the IRS;
- If you receive a phone call, fax or letter in the mail from an individual claiming to be from the IRS but you suspect they are not an IRS employee, contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. Report any bogus correspondence. Forward a suspicious email to firstname.lastname@example.org;
- You can help the IRS and other law enforcement agencies shut down these schemes. Visit the IRS.gov website to get details on how to report scams and helpful resources if you are the victim of a scam. Click on “Reporting Phishing” at the bottom of the page.
Your children may help you qualify for valuable tax benefits, such as certain credits and deductions. If you are a parent, here are eight benefits you shouldn’t miss when filing taxes this year.
- Dependents. In most cases, you can claim a child as a dependent even if your child was born anytime in 2012. For more information, see IRS Publication 501, Exemptions, Standard Deduction and Filing Information.
- Child Tax Credit. You may be able to claim the Child Tax Credit for each of your children that were under age 17 at the end of 2012. If you do not benefit from the full amount of the credit, you may be eligible for the Additional Child Tax Credit. For more information, see the instructions for Schedule 8812, Child Tax Credit, and Publication 972, Child Tax Credit.
- Child and Dependent Care Credit. You may be able to claim this credit if you paid someone to care for your child or children under age 13, so that you could work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.
- Earned Income Tax Credit. If you worked but earned less than $50,270 last year, you may qualify for EITC. If you have qualifying children, you may get up to $5,891 dollars extra back when you file a return and claim it. Use the EITC Assistant to find out if you qualify. See Publication 596, Earned Income Tax Credit.
- Adoption Credit. You may be able to take a tax credit for certain expenses you incurred to adopt a child. For details about this credit, see the instructions for IRS Form 8839, Qualified Adoption Expenses.
- Higher education credits. If you paid higher education costs for yourself or another student who is an immediate family member, you may qualify for either the American Opportunity Credit or the Lifetime Learning Credit. Both credits may reduce the amount of tax you owe. If the American Opportunity Credit is more than the tax you owe, you could be eligible for a refund of up to $1,000. See IRS Publication 970, Tax Benefits for Education.
- Student loan interest. You may be able to deduct interest you paid on a qualified student loan, even if you do not itemize your deductions. For more information, see IRS Publication 970, Tax Benefits for Education.
- Self-employed health insurance deduction – If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid to cover your child. It applies to children under age 27 at the end of the year, even if not your dependent. See IRS.gov/aca for information on the Affordable Care Act.
For help in preparing these forms give us a call at 800-560-4NFS today.