Forgiven Debt Could Equal Taxable Income
February 11, 2010 | 
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In these troubled economic times, many financially distressed borrowers may have had some or all of their debt cancelled or forgiven by their lender last year. While such relief was no doubt welcome to people who received it, what they may not have realized is that debt forgiveness may have tax consequences. Specifically, debt forgiven in 2009 may have to be included as income on your 2009 return. However, not all canceled debts trigger taxable income.
General rule: The tax laws specifically include income from the discharge of indebtedness in gross income. However, there are several exceptions to this rule. In addition, there are numerous exclusions from gross income for certain types of forgiven debts.
Exceptions:
- If the cancellation of debt by a private lender, such as a relative or friend, is intended as a gift, there is no income. Likewise, a debt canceled by a private lender’s Last Will and Testament triggers no income to the borrower.
- There is also an exception for certain student loans. For example, doctors, nurses, and teachers agreeing to serve in rural or low income areas in exchange for cancellation of their student loans won’t have income from the cancellation if they meet certain conditions.
- Also keep in mind that there is no income from cancellation of deductible debt. For example, if a lender cancels home mortgage interest that could have been claimed as an itemized deduction on Schedule A of Form 1040, there is no tax problem to contend with.
- Price adjustment. There is no income if an individual purchases property and the seller later reduces the price. The purchaser’s basis (yardstick for measuring gain or loss on a later sale) in the property, however, is reduced by the amount of the purchase price adjustment.
Exclusions: In addition to the above exceptions, there are exclusions from the general rule for reporting canceled debt as income for:
- discharge of debt through bankruptcy,
- discharge of debt of an insolvent taxpayer,
- discharge of qualified farm debt,
- discharge of qualified real property business debt, and
- discharge of qualified principal residence debt.
These exclusions are quite complicated and you should have a detailed discussion with a tax advisor to determine if you qualify.
Submitted by Sam Cohen
Questions:
2009 Tax Deductions for Donations to Haiti
February 8, 2010 | Subscribe to our RSS Feed
Tax payers who make a charitable donation towards Haitian earthquake victims this year can write it off on their 2009 return this spring, instead of waiting until they file their 2010 returns. Congress signed this special provision into law to encourage Americans to help the Haitian victims.
Donations must be in the form of cash contributions to an organization providing relief to Haiti. Contributions made via cell phone do qualify, the phone bill will meet the IRS’s record keeping requirement. You must make your donation by the end of February to be eligible for the deduction in 2009.
A similar law was passed in 2005 for donations to the Indian Ocean tsunami.
Submitted by Tammy Schneider
Questions:
tammy.schneider@glassjacobson.com
9 Things to Know About The EITC
February 5, 2010 | Subscribe to our RSS Feed
The Earned Income Tax Credit (EITC) is very easy to overlook, but could be a huge boost to taxpayers adversely affected by the hard economic times. Here are 9 things you need to know about this valuable credit:
- Just because you didn’t qualify last year, doesn’t mean you won’t this year. As your financial, marital or parental situations change from year-to-year, you should review the EITC eligibility rules to determine whether you qualify.
- If you qualify, it could be worth up to $5,657 this year. EITC not only reduces the federal tax you owe, but could result in a refund. New EITC provisions mean more money for larger families.
- If you qualify, you must file a federal income tax return and specifically claim the credit in order to get it – even if you are not otherwise required to file.
- Your filing status cannot be Married Filing Separately.
- You must have a valid Social Security Number. You, your spouse – if filing a joint return – and any qualifying child listed on Schedule EIC must have a valid SSN issued by the Social Security Administration.
- You must have earned income.
- Married couples and single people without kids may qualify. If you do not have qualifying children, you must also meet the age and residency requirements as well as dependency rules.
- Special rules apply to members of the U.S. Armed Forces in combat zones. Members of the military can elect to include their nontaxable combat pay in earned income for the EITC. If you make this election, the combat pay remains nontaxable.
- It’s easy to determine whether you qualify. The EITC Assistant, an interactive tool available on IRS.gov, removes the guesswork from eligibility rules. Just answer a few simple questions to find out if you qualify and estimate the amount of your EITC.
Submitted by Sam Cohen
Questions?
5 Reasons For Direct Deposit- #1 is Faster Refund!
February 4, 2010 | Subscribe to our RSS Feed
If you want to get your refund as quickly as possible, have the IRS deposit your refund directly into your bank account. By choosing Direct Deposit, you can get your refund much sooner than if you chose to have a paper check mailed to you.
A couple more benefits:
1. Security Thousands of paper checks are returned to the IRS by the U.S. Post Office every year as undeliverable mail. Direct Deposit eliminates the possibility you won’t receive your check and prevents your refund from being stolen.
2. Convenience The money goes directly into your bank account.
3. Ease When you’re preparing your return, simply follow the instructions on your return.
4. Options You can also deposit your refund into multiple accounts. With the split refund option, taxpayers can divide their refunds among as many as three checking or savings accounts and up to three different U.S. financial institutions.
Submitted by Sam Cohen
Questions:
Inflation Expectations- Real or Perceived?
January 28, 2010 | Subscribe to our RSS Feed
Our investment team has put out their 2010 First Quarter Update.
Click here to see what they have to say: Inflation Expectations
Questions for Jon Dinkins?
jon.dinkins@glassjacobsonIA.com