Yep, that chicken has come home to roost!
I have to preface this with the statement that I do not work for the IRS. I am not a CPA. I am just an average guy that reads the newspaper. Recently, I came across an article about taxes. Now the focus of the article related to the fact that the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which became law on December 17, 2010 has put the IRS in a jam. The IRS has to create all new forms to comply with the law, so if you itemize your taxes, you probably won’t be able to file until mid-to-late February.
This news doesn’t change the fact that you have to have your paperwork ready by April 15 (this year you have until April 18th because the 15th falls on Emancipation Day). Most home owners need to be on the lookout for their 1098 from their lenders. You will need this when you file (if you itemize).
If you were involved in a short sale of your house last year or if your house was foreclosed on last year, keep checking your mailbox for the 1099-C that is on it’s way to you. If $600 or more of debt was cancelled (or forgiven), your lender is required to send this form to you.
In many cases, a tax must be paid on the amount of debt cancelled!
Now, the other shoe falls
Now there are three important exceptions. If you filed for bankruptcy and the amount of the cancelled debt was authorized by the judge, the amount cancelled is not considered income and no additional tax is due. If you were insolvent immediately before the cancellation ( a loose definition is the total of your liabilities exceeded your assets) no additional tax is due. Also, if the cancelled debt relates to your principal residence and the money borrowed was to buy, build or substantially improve the home, you will not have to pay any tax on the debt that was cancelled.
If you refinanced and used that money to pay for your children’s education, to buy a new car, to buy a boat, to go on vacation, to pay off credit cards ( or any other purpose other than for the house) you will have to pay tax on that cancelled debt.
The price of that fancy car just went up.
If you receive Form 1099-C and you believe in your heart of hearts that you qualify under one of the three exclusions, you have to complete and file Form 982 with your final income tax return. Once completed, it probably won’t hurt to drop by a local church and light a candle.
If you used your equity in your home like it was an ATM machine, well it is time to pay the piper. You see, that bird on your fence is a chicken come home to roost.
For more information about this or any tax issue, please visit the IRS website irs.gov.