Mortgage Debt Forgiveness: 10 Key Points IRS Tax Tip 2012-39

Canceled debt is normally taxable to you, but there are exceptions. One of those exceptions is available to homeowners whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012.

The IRS would like you to know these 10 facts about Mortgage Debt Forgiveness:

1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.

2. The limit is $1 million for a married person filing a separate return.

3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.

4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.

5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.

6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.

7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.

8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.

9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.

10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.

For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit www.irs.gov. IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments, is also an excellent resource.

You can also use the Interactive Tax Assistant available on the IRS website to determine if your cancelled debt is taxable. The ITA takes you through a series of questions and provides you with responses to tax law questions.

Finally, you may obtain copies of IRS publications and forms either by downloading them from www.irs.gov or by calling 800-TAX-FORM (800-829-3676).


Links:
•Form 982
•Form 1099-C
•Publication 4681

What do you do if you are missing a Form W2?

IRS Tax Tip 2012-20

Make sure you have all the needed documents, including all your Forms W-2, before you file your 2011 tax return. You should receive an IRS Form W-2, Wage and Tax Statement, from each of your employers. Employers have until Jan. 31, 2012 to issue your 2011 Form W-2 earnings statement.

If you haven’t received your W-2, follow these four steps:

1. Contact your employer If you have not received your W-2, contact your employer to inquire if and when the W-2 was mailed. If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address. After contacting the employer, allow a reasonable amount of time for them to resend or issue the W-2.

2. Contact the IRS If you do not receive your W-2 by Feb. 14, contact the IRS for assistance at 800-829-1040. When you call, you must provide your name, address, Social Security number, phone number and have the following information:

• Employer’s name, address and phone number

• Dates of employment

• An estimate of the wages you earned, the federal income tax withheld, and when you worked for that employer during 2011. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible.

3. File your return You still must file your tax return or request an extension to file by April 17, 2012, even if you do not receive your Form W-2. If you have not received your Form W-2 in time to file your return by the due date, and have completed steps 1 and 2, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement. Attach Form 4852 to the return, estimating income and withholding taxes as accurately as possible. There may be a delay in any refund due while the information is verified.

4. File a Form 1040X On occasion, you may receive your missing W-2 after you file your return using Form 4852, and the information may be different from what you reported on your return. If this happens, you must amend your return by filing a Form 1040X, Amended U.S. Individual Income Tax Return.

Form 4852, Form 1040X and instructions are available on this website or by calling 800-TAX-FORM (800-829-3676).


Links:
•Form 4852, Substitute for Form W-2, Wage and Tax Statement
•Form 1040X, Amended U.S. Individual Income Tax Return and instructions

Reporting Sales Transactions on your Individual Return by Carolyn Flaherty

Missing a 1099 from your brokerage firm? Don't get on the phone quite yet. As was mentioned in our blog on February 2, there have been extensive changes to the way in which sales of capital assets are reported. As such, investment firms were given an extension until February 15, 2012 to mail the required 1099-B forms. Therefore, you should expect to receive your tax forms by or around February 20th.

When you receive your 1099-B Forms, you will likely notice a number of changes in both what and how information is reported. However, interpreting your 1099-B is only the first hurdle in your tax compliance process: next you must transcribe the data properly onto your Form 1040.

In the past, gains and losses generated from the sale of a capital asset were reported on Schedule D or D-1 of your Form 1040. Most property you own and use for personal purposes, pleasure or investment is a capital asset. Generally the information required on Schedule D was your cost or tax basis in the property, the sales price, and the dates of purchase and sale, (to determine whether the transaction was short-term or long-term).

For 2011 the reporting requirements have become more complex and demand more information. Capital asset transactions will now be reported on Form 8949. Short term transactions (those held for one year or less) must be reported on Part I of Form 8949, while long-term capital gains or losses will be reported on Part II.

When completing either Part I or Part II Form 8949, you must check a box indicating the transactions were:

(A) reported on Form 1099-B with basis reported to the IRS
(B) reported on Form 1099-B but basis not reported to the IRS
(C) cannot check box A or B

Therefore, if you receive a 1099-B that shows cost basis, you would check box (A). If the 1099-B does not indicate basis, you would check box (B). If the transaction was not reported on a 1099, you are forced to check box (C). Only one box can be checked per form. Hence, if you have multiple types of transactions you could be filing up to three short-term Part I Forms 8949 and up to three long-term Part II Forms 8949. Thankfully most of us file electronically or the trees would be pulling up roots and running scared!

Furthermore, if you receive a 1099-B that reports cost basis but you adjust that basis, you must show the amount of the adjustment so that the IRS can reconcile from the basis you report back to the 1099. Then, you must enter a code explaining your adjustment. Some common reasons that you may need to adjust the basis from the amount on your Form 1099-B may be that the 1099-B showed an incorrect amount, you received the 1099-B as a nominee, or the transaction resulted in a wash sale.
Additional codes listed in the instructions include:

DC Zone or qualified community asset
Section 1045 rollover
Section 1397B rollover
Personal or other non-deductible loss
Other adjustment

To reiterate the 2/2/12 blog conclusion: If you have prepared your own return in the past, the new requirements may be reason enough to have a “tax check-up” this year and allow a preparer to guide you through the changes.

IRS Tax Tip 2012-16 from IRS

Tax Tips for the Self-employed

There are many benefits that come from being your own boss. If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are generally considered to be self-employed.

Here are six key points the IRS would like you to know about self-employment and self- employment taxes:

1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.

2. If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.

3. You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.

4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.

5. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.

6. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

For more information see the Self-employment Tax Center, IRS Publication 334, Tax Guide for Small Business, IRS Publication 535, Business Expenses and Publication 505, Tax Withholding and Estimated Tax, available at www.irs.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).


Links:
•Publication 334, Tax Guide for Small Business
•Publication 535, Business Expenses
•Publication 505, Tax Withholding and Estimated Tax
•Schedule C, Profit or Loss from Business and instructions
•Schedule C-EZ, Net Profit from Business
•Schedule SE, Self-Employment Tax and instructions
•Form 1040-ES, Estimated Tax for Individuals

Things you should know for the 2011 Tax Season by Carolyn Flaherty

Due to the final hour December 17 2010 Tax Relief Act, many of the provisions set to sunset have been extended through the 2011 tax year and thus the landscape of tax reporting and preparation remains relatively consistent for the year. However, below is a list of items individuals should be aware of when preparing their 2011 income tax return.
• Due date: The tax return due date has been extended until Tuesday April 17th for the 2011 tax season.
• First Time Homebuyer Credit: If you took advantage of the First-Time Homebuyer credit during a period where repayment was required; the payment due must be reported on Line 59b of your Form 1040.
• The Making Work Pay Credit expired as of 12/31/10
• Sales of Investments: There have been extensive changes to the way in which sales of investments are reported. The reporting requirements have become more complex and demand more information. In order to comply with new requirements, transactions must be reported on multiple Forms 8949 rather than directly on Schedule D. Your tax preparer will require all 1099s in order to properly report your transactions. If you have prepared your own return in the past, the new requirements may be reason enough to have a “tax check-up” this year and allow a preparer to guide you through the changes.
• Energy Credit: There is a credit available for 2011 equal to 10% of eligible energy-saving improvements. The maximum credit is $500. Note that if you took advantage of energy credits in 2006, 2007, 2008, 2009 or 2010 these credits must be subtracted from your potential 2011 credit. Therefore, unless you are making energy efficient improvements for the first time in 2011, it is unlikely that you will be able to take advantage of this credit.
• Standard Mileage Rates: Mileage rates were 51 cents for miles driven January through June of 2011 and 55.5 cents a mile for the remainder of the year. Therefore, you must supply mileage based on these periods.

Mileage as part of a deductible move was 19 cents per mile for the first six months of 2011 and 23.5 cents per mile for the remainder of the year. Charitable miles may be deducted at 14 cents a mile for all 12 months of the year.

• Roth Conversions: If you did a Roth Conversion in 2010 and elected to spread the respective tax liability over 2011 and 2012, the first half of that payment will be due with your 2011 return.
• Inherited Assets: If you inherited assets from an estate that elected to take advantage of the 2010 estate tax repeal option, you will receive a From 8939 from the executor providing your basis for these assets. Taking advantage of the estate tax repeal option will typically cause assets to be passed to you at a carryover basis; that is the basis in the hands of the decedent. Therefore, if such inherited assets were sold during the year; your gain and hence your tax liability may be higher than you anticipated.
• Educator Expenses: Educators are allowed to deduct $250 of out of pocket expenses in 2011.
• Health Savings Accounts and Medical Savings Accounts: If you take distributions from these accounts that are NOT used for qualified medical expenses, the additional tax penalty for 2011 will be 20%.
• Foreign Assets: Another area of tax reporting that has become more onerous for 2011 is the disclosure of foreign assets. The Foreign Tax Compliance Act requires foreign assets to be reported if they have a total value of more than $50,000. Assets include stock or securities, interest in a foreign entity, financial instruments or contracts, homes, land etc.
• Alternative Minimum Tax: Exemptions Increased in 2011 to $74,450 married filing a joint return; $37,225 married filing separately and $48,450 single.
• Phase outs – there is no adjusted gross income phase out of itemized deductions or personal exemptions in 2011.

For Massachusetts taxpayers:

• Student Loan Interest: Massachusetts has its own student loan interest deduction for undergraduate interest that must be separately entered on the Massachusetts return.
• Commuter Deduction: The Massachusetts commuter deduction is the amount of qualified commuting expenses in excess of $150 but not more than $750 and includes MBTA passes.