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Don Priebe -January 2011Cancellation of Debt1 Other Income Awards, Prizes Gambling Income Election, Jury Duty Non-employee Compensation Cancellation of.

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Presentation on theme: "Don Priebe -January 2011Cancellation of Debt1 Other Income Awards, Prizes Gambling Income Election, Jury Duty Non-employee Compensation Cancellation of."— Presentation transcript:

1 Don Priebe -January 2011Cancellation of Debt1 Other Income Awards, Prizes Gambling Income Election, Jury Duty Non-employee Compensation Cancellation of Debt

2 Don Priebe -January 2011Cancellation of Debt2 Not covered in Pub 4491 (text book) Pub 4681 (rev April 2010) Mandatory training and certification module available on Link and Learn website (

3 Don Priebe -January 2011Cancellation of Debt3 Basic Concept Cancellation of a legal debt is taxable income to the debtor in the amount of the debt cancelled. COD is reported on a 1099-C There are a myriad of exceptions to the basic concept.

4 Don Priebe -January 2011Cancellation of Debt4 What is in-scope Only two specific cases of cancellation of debt are in scope for AARP/TCE Cancellation of consumer debt with full inclusion of income (new this year) Cancellation of mortgage debt on principle residence with full exclusion from income Pub 4731 is a two page worksheet to determine if COD is in-scope. (in the Pub 4012 resource book)

5 Don Priebe -January 2011Cancellation of Debt5 Example – credit card Sam and Jan were doing fine until Jan lost her job. They maxed out their credit cards and stopped making payments. The credit card banks started collection proceedings, but when they saw that Sam and Jan had no real assets to attach, they settled for 50 cents on the dollar and canceled the rest. Their KIA was repossessed

6 Don Priebe -January 2011Cancellation of Debt6 Form 1099-C 12,200 Bank of America 111-11-1111

7 Don Priebe -January 2011Cancellation of Debt7 Scope worksheet – credit card

8 Don Priebe -January 2011Cancellation of Debt8 Scope worksheet – credit card

9 Don Priebe -January 2011Cancellation of Debt9 Reporting credit card 1099-C These are reported as Other Income on form 1040 line 21 There is no 1099-C input form on TaxWise Go to 1040 line 21 Type and link to Form 1040 Line 21 Other Income

10 Don Priebe -January 2011Cancellation of Debt10 Example – credit card

11 Don Priebe -January 2011Cancellation of Debt11 Example – credit card

12 Don Priebe -January 2011Cancellation of Debt12 What happens if there is interest in box 3 If the interest would have been deductible (e.g. mortgage interest) subtract it from box 2 If the interest would not have been deductible (e.g. credit card interest) do not subtract from box 2 It is out of scope

13 Don Priebe -January 2011Cancellation of Debt13 What if the client was insolvent just before the debt was forgiven You would fill out the insolvency worksheet in Pub 4681 The forgiven debt would not be included in income It is out of scope

14 Don Priebe -January 2011Cancellation of Debt14 What happens to debt forgiven in bankruptcy The forgiven debt is not included in income It is out of scope

15 Don Priebe -January 2011Cancellation of Debt15 Cancellation of debt - mortgage Since the cancellation of mortgage debt and/or foreclosure is relatively rare, and involves a large amount of money, make use of the IRS pubs and worksheets Remember – You must be specifically trained and certified in Cancellation of Debt to do these returns.

16 Don Priebe -January 2011Cancellation of Debt16 Mortgage Debt Special regulations apply to forgiveness of mortgage debt on your principle residence Up to One Million dollars of qualified debt can be forgiven without inclusion in taxable income ($2.0M MFJ) Only the simplest scenarios are in-scope

17 Don Priebe -January 2011Cancellation of Debt17 Example - mortgage Sam and Jan had bought a house at the top of the real estate boom. They paid $600K for the house - $60K down and a mortgage for $540K. After living in the house for three years, not only did Jan lose her job, but the real estate market tanked. They still owe $530K on the house but now its only worth $480K. They stop making their mortgage payments. The bank forecloses on the mortgage, and Sam and Jan are evicted. The bank sells the house for $480K, but they are still on the hook for the remaining $50K. (Recourse loan.) Rather than sue Sam and Jan for the $50K that they dont have, the bank decides to write it off as a bad debt and sends Sam and Jan a 1099-C for $50K.

18 Don Priebe -January 2011Cancellation of Debt18 Form 1099-C for mortgage

19 Don Priebe -January 2011Cancellation of Debt19 Scope worksheet - mortgage

20 Don Priebe -January 2011Cancellation of Debt20 Scope worksheet - mortgage

21 Don Priebe -January 2011Cancellation of Debt21 Form 982 Cancellation of qualified mortgage debt is reported on form 982, not on form 1040 line 21 On form 982 check box 1e and enter the amount on line 2 Leave line 10b blank unless taxpayer still owns the house after the debt forgiveness (Per IRS instructions; TaxWise disagrees)

22 Don Priebe -January 2011Cancellation of Debt22 TaxWise form 982

23 Don Priebe -January 2011Cancellation of Debt23 Form 1099-A If the residence is taken by the bank, they may issue a 1099-A giving the details. Alternately they may include the information on a 1099-C Refer to Pub 4681 for processing the 1099-A with or without a 1099-C

24 Don Priebe -January 2011Cancellation of Debt24 Form 1099-A for mortgage

25 Don Priebe -January 2011Cancellation of Debt25 Example - foreclosure This is treated as the sale of a principle residence Use Sale of Home worksheet 2 on Schedule D with special attention to the selling price

26 Don Priebe -January 2011Cancellation of Debt26 Foreclosure – Selling Price If borrower is responsible for balance of debt (box 5 checked yes; recourse loan), sales price is lesser of outstanding debt or FMV If borrower is not responsible for balance of loan (box 5 checked no; non-recourse loan) sales price is outstanding debt Pub 4681 has worksheet Example sales price - $480,000

27 Don Priebe -January 2011Cancellation of Debt27 Pub 4681 Worksheet

28 Don Priebe -January 2011Cancellation of Debt28 Foreclosure – Basis Basis is calculated as usual Purchase price Plus purchase closing costs Plus improvements Plus selling closing costs Less deductible disaster losses Example basis - $600,000

29 Don Priebe -January 2011Cancellation of Debt29 Reporting the Sale Link and Learn recommends reporting any sale documented on a 1099-A The Sch D worksheet does not carry to Sch D for residence sales at a loss Manually enter

30 Don Priebe -January 2011Cancellation of Debt30 Cancellation of debt without repossession If the bank simply cancels (part of) the mortgage debt without repossessing the house … Line 10b of the 982 has an entry The basis of the house is reduced by the amount on 10b No 1099-A is issued No Schedule D is prepared

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