Form 1099-C CPA tax accountant augments the IRS Form 982 instructions | tax reporting for debt canellation

As a Form 1099-C CPA tax accountant I often hear frustrated Folks state the IRS Form 982 instructions are too complex. Here’s a tip. For people, as opposed to business entities, the real Form 982 instructions are in IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. The IRS Form 1099-C instructions are meant for banks issuing 1099-C(s). Go figure. Does the IRS intentionally make cancelled debt tax reporting difficult? I don’t think so. Form 982, Reduction of Tax Attributes, just covers a broad range of tax circumstances. Another twist on the Form 982 instructions? It requires information and calculations from outside Form 982 and Form 1099-C. Plus there’s often a substantial amount of potential increased tax due. Figure you’ll pay about 25-30% of the number in Box 2 of Form 1099-C in additional taxes unless you can exclude from taxable income via Form 982. Tax reporting for debt cancellation gets tricky and includes future year tax consequences. Confusing instructions make tax preparation even harder.

Form 982; Discharge of qualified principal residence indebtedness for 2014

Well the 2014 Form 982 won’t have this exclusion. Unless Congress extends it. There is a bill pending from the Senate Finance Committee to do so. At the moment, primary residence related cancelled debt, e.g foreclosures, loan modifications and short sales, must utilize the Form 982 Discharge of indebtedness to the extent insolvent (not in a title 11 case) exclusion. Most Folks simply call that insolvency.

Form 982; Discharge of indebtedness to the extent insolvent (not in a title 11 case) for 2014

FAQs Insolvency CPAs hear.

• I make too much money to qualify for using the insolvency exclusion on Form 982.
  • Form 982 insolvency uses your assets and liabilities, not income.
  • I’ve had Folks earning $200K+ qualify for the insolvency.
• How does insolvency help me? I didn’t go bankrupt.
  • The IRS definition of insolvency means you had more outstanding bills than assets.
    • The term underwater might make insolvency easier to understand.
• If my IRS insolvency is less than the amount in box 2 of Form 1099-C, Cancellation of Debt, I don’t get any cancelled debt write off?
  • No. If your Form 1099-C shows $30,000 and you’re $20,000 insolvent, you only pay taxes on the $10,000.
• Does Form 982 have future tax consequences?
  • Sometimes.

Form 982; Discharge of indebtedness in a title 11 case

Title 11 means bankruptcy. Some Folks understandably get confused when the bankruptcy provision of Form 982 doesn’t include the word bankruptcy. Go figure.

Form 982: Discharge of qualified real property business indebtedness

The most common Form 1099-C case I handle involves rental real estate. For people e.g. Schedule E landlords, that means a rental property foreclosure, rental property abandonment, rental property short sale, mortgage modification, etc. Note that rental real estate property cancelled debt, for Schedule E landlords can use both the insolvency exclusion and the discharge of qualified real property business indebtedness exclusion of Form 982.

Here’s list of IRS tax Form 1099-C CPA tips

• Never assume the Form 1099-C, Cancellation of Debt, is accurate.
  • Sometimes I’ll challenge the date.
  • I’ve had one case of apparent identify fraud.
• Form 1099-C tax returns often have red flags.
  • I’ve found that most red flag issues are, in fact, legitimate.
  • So, consider sending documentation and explanations in with the 2014 tax return.
• Exhaust every aspect of Form 982 before paying taxes on cancelled debt income from Form 1099-C.
• Sometimes there are tax positioning strategies that could decrease the amount of cancelled debt income.
• Don’t ignore the future tax consequences of Form 982.
  • The reduction of tax attributes gets tricky.

I’m a Form 1099-C CPA accountant with a virtual office

How did I become a cancelled debt specialist? When I worked for a brick and mortar CPA firm we never saw a single case of cancelled debt. And even if we did, I think the case would be rejected due to lack of experience and increased tax research expense. I never even dreamed I’d develop tax preparation specialties. I just think the virtual office draws form a wider potential base.

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