Filed Under Debt Reduction, Tax
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An inside look at the IRS Rules regarding Debt Elimination
In this age of economic meltdown and post recession hangover, the number of consumers filing bankruptcy is increasing day by day. In fact, these days, the incidents of debt elimination and debt forgiveness are quite common. However, IRS claims most of this forgiven debt as taxable income and the consumers have to pay off the debt amount some way or the other. Nevertheless, the good news is when the financial catastrophe took place in the 2000; IRS took a softer line on certain debt issues. For all other debts, tax exclusions generally depend on the consumer’s particular financial situation.
Mortgage Debt Relief Act
In 2007,Mortgage Debt Relief Act came into effect, which is valid till 2012. According to this 2007 tax legislation, taxpayers can exclude up to $2 million of mortgage debt forgiveness on their principal residence, if they are single and if they are married the amount forgiven is 1 million per individual. This is only applicable under certain situations. For example when your home value declines, when you are unable to pay your mortgage any more, when you fail to reduce your debt loads even after a mortgage refinance and finally when your properties is seized by the lenders due to foreclosure. Only under the above mentioned situations you will be able to relieve the debt without counting it as income. Report your debt cancellation on the IRS’s 982 form, called Discharge of Indebtedness during tax season.
If your debts are discharged under bankruptcy, you won’t have to worry about the canceled debt being taxable income. In fact, if the debt was released during a Chapter 11 bankruptcy case for a corporation, the IRS will still regard it as non-income. In addition, when a lender cancels your debt because it holds equal value of your assets, IRS will allow canceled debts to be tax-free.
In fact, your canceled student loan could be eligible for exemption from taxation, provided you made an agreement with the creditors that you will work in a certain job for a stipulated time period of time or the IRS considers that you have other significant obligations in place of paying the loan. Moreover, exclusion of student loan from taxable income could be possible, if the loan was offered by a government organization or a tax-exempt corporation or a school that offers placement service for students.
If your debt is all from farming expenses, you are entitled to some IRS breaks when it comes to debt cancellations. In fact the canceled debt won’t be counted as taxable income at all, if half of your income from the last three years was due to farming.