Monday, March 26, 2012

Mortgage Debt Forgiveness: 10 Key Points


Our friends at the IRS have provided another concise guide to an unfortunate aspect of these tough economic times.  In Tax Tip 2012-39, the IRS lays out the basics on dealing with debt forgiveness.  If you find yourself in this position and the below does not help address your tax reporting concerns, please contact our Firm to discuss further. 

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.

brad@mcarthurco.com
704.544.8429

Monday, March 12, 2012

1099 Rules Reviewed


Generally, any trade or business that makes payments in the course of that trade or business of interest, rents, compensations, remuneration for services, annuities, etc. aggregating $600 or more for the year to a single payee is required to report the payments to the IRS and to the recipient of the payments by filing Form 1099. This reporting requirement generally does not apply to payments to corporations. However, the 1099 reporting requirements do apply to payments made to corporations for attorneys' fees, and to amounts paid to corporations providing medical or health care services.

A Form 1099 is generally required to be filed with the recipient of the payment by January 31 of the year following the year the payment is made. A copy of Form 1099 is generally required to be filed with the IRS by the end of February of the year following the year the payment is made.

The penalties for failing to file 1099s, or filing 1099s late, are significant. For example, if a Form 1099 is filed after August 1st and the failure to file is not intentional, there is a $100 penalty for failing to file Form 1099 with the recipient of the payment and an additional $100 penalty for failing to file a copy of Form 1099 with the IRS (for a total penalty of $200).  Note! IRS may waive these penalties if you can show reasonable cause for failing to file the form. Caution! If you intentionally fail to file Form 1099, then the penalty increases to at least $500 per 1099 (a $250 penalty for failing to file Form 1099 with the recipient of the payment and a $250 penalty for failing to file a copy with the IRS).

The IRS has included two new questions concerning Form 1099 on all business returns, including Form 1040, Schedule C, Schedule F, and Schedule E as well as Forms 1065, 1120, and 1120-S. The questions are 1) “Did you make any payments in 2011 that would require you to file Form(s) 1099", and 2) “If ‘Yes,’ did you or will you file all required Forms 1099?”  These questions now must be answered when preparing your business returns.
               
The 1099 rules are confusing to many small business owners.  If you have questions on how you should treat a given service provider, please contact our Firm or your CPA for assistance. 

brad@mcarthurco.com
704.5448429