Geneva Cancellation of Debt Presentation by chenmeixiu

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									                  Cancellation of Debt

      Not covered in Pub 4491 (text book)
      Pub 4681 (rev April 2010)
      Mandatory training and certification
       module available on Link and Learn
       website (http://www.irs.gov/app/vita/)
      These slides on www.w2in.com/aarp


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                        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.


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                        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)
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                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
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                              Form 1099-C

Bank of America
                                      12,200




                        111-11-1111




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   Scope worksheet – credit card




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   Scope worksheet – credit card




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  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’


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                Example – credit card




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                Example – credit card




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            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

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 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



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              What happens to debt
              forgiven in bankruptcy
      The forgiven debt is not included in
       income
      It is out of scope




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  Mortgage Debt
      Special regulations apply to forgiveness
       of mortgage debt on your principle
       residence
      Up to $2.0 million of qualified debt can
       be forgiven without inclusion in taxable
       income
      Only the simplest scenarios are in-scope

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 Scope worksheet - mortgage




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  Scope worksheet - mortgage




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    Example - mortgage
   Since the cancellation of mortgage debt
    and/or foreclosure is relatively rare, the
    example will be included in the handout
   Remember – You must be specifically
    trained and certified in Cancellation of
    Debt to do these returns.


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                  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 it’s 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 don’t have,
       the bank decides to write it off as a bad debt and sends Sam
       and Jan a 1099-C for $50K.


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     Form 1099-C for mortgage




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  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)

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                        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

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  Form 1099-A for mortgage




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  Example - foreclosure
      Since this is a sale of a principle
       residence, use Sale of Home worksheet
       2 on Schedule D with special attention
       to selling price




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  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

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     Pub 4681 Worksheet




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  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

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  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



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  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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