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Form1040ez

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Form1040ez

Form1040ez 5. Form1040ez   Credits Table of Contents Credit for the Elderly or the DisabledCan You Take the Credit? Figuring the Credit Child and Dependent Care Credit Earned Income Credit (EIC)Do You Qualify for the Earned Income Credit (EIC)? Figuring the EIC This chapter briefly discusses the credit for the elderly or disabled, the child and dependent care credit, and the earned income credit. Form1040ez You may be able to reduce your federal income tax by claiming one or more of these credits. Form1040ez Credit for the Elderly or the Disabled This section explains who qualifies for the credit for the elderly or the disabled and how to figure this credit. Form1040ez For more information, see Publication 524, Credit for the Elderly or the Disabled. Form1040ez You can take the credit only if you file Form 1040 or Form 1040A. Form1040ez You cannot take the credit if you file Form 1040EZ or Form 1040NR. Form1040ez Can You Take the Credit? You can take the credit for the elderly or the disabled if you meet both of the following requirements. Form1040ez You are a qualified individual. Form1040ez Your income is not more than certain limits. Form1040ez  You can use Figure 5-A and Figure 5-B as guides to see if you are eligible for the credit. Form1040ez   Qualified Individual You are a qualified individual for this credit if you are a U. Form1040ez S. Form1040ez citizen or resident alien, and either of the following applies. Form1040ez You were age 65 or older at the end of 2013. Form1040ez You were under age 65 at the end of 2013 and all three of the following statements are true. Form1040ez You retired on permanent and total disability (explained later). Form1040ez You received taxable disability income for 2013. Form1040ez On January 1, 2013, you had not reached mandatory retirement age (defined later under Disability income ). Form1040ez Age 65. Form1040ez You are considered to be age 65 on the day before your 65th birthday. Form1040ez Therefore, you are considered to be age 65 at the end of 2013 if you were born before January 2, 1949. Form1040ez Figure 5-A. Form1040ez Are You a Qualified Individual? This image is too large to be displayed in the current screen. Form1040ez Please click the link to view the image. Form1040ez Figure 5-A, Are you a qualified individual? U. Form1040ez S. Form1040ez citizen or resident alien. Form1040ez   You must be a U. Form1040ez S. Form1040ez citizen or resident alien (or be treated as a resident alien) to take the credit. Form1040ez Generally, you cannot take the credit if you were a nonresident alien at any time during the tax year. Form1040ez Exceptions. Form1040ez   You may be able to take the credit if you are a nonresident alien who is married to a U. Form1040ez S. Form1040ez citizen or resident alien at the end of the tax year and you and your spouse choose to treat you as a U. Form1040ez S. Form1040ez resident alien. Form1040ez If you make that choice, both you and your spouse are taxed on your worldwide income. Form1040ez   If you were a nonresident alien at the beginning of the year and a resident alien at the end of the year, and you were married to a U. Form1040ez S. Form1040ez citizen or resident alien at the end of the year, you may be able to choose to be treated as a U. Form1040ez S. Form1040ez resident alien for the entire year. Form1040ez In that case, you may be allowed to take the credit. Form1040ez   For information on these choices, see chapter 1 of Publication 519, U. Form1040ez S. Form1040ez Tax Guide for Aliens. Form1040ez Married persons. Form1040ez   Generally, if you are married at the end of the tax year, you and your spouse must file a joint return to take the credit. Form1040ez However, if you and your spouse did not live in the same household at any time during the tax year, you can file either a joint return or separate returns and still take the credit. Form1040ez Head of household. Form1040ez   You can file as head of household and qualify to take the credit even if your spouse lived with you during the first 6 months of the year if you meet certain tests. Form1040ez See Publication 524 and Publication 501. Form1040ez Under age 65. Form1040ez   If you are under age 65 at the end of 2013, you can qualify for the credit only if you are retired on permanent and total disability and have taxable disability income (discussed later under Disability income ). Form1040ez You are considered to be under age 65 at the end of 2013 if you were born after January 1, 1949. Form1040ez You are retired on permanent and total disability if: You were permanently and totally disabled when you retired, and You retired on disability before the end of the tax year. Form1040ez   Even if you do not retire formally, you may be considered retired on disability when you have stopped working because of your disability. Form1040ez If you retired on disability before 1977 and were not permanently and totally disabled at the time, you can qualify for the credit if you were permanently and totally disabled on January 1, 1976, or January 1, 1977. Form1040ez Permanent and total disability. Form1040ez   You are permanently and totally disabled if you cannot engage in any substantial gainful activity because of your physical or mental condition. Form1040ez A physician must certify that the condition has lasted or can be expected to last continuously for 12 months or more, or that the condition can be expected to result in death. Form1040ez See Physician's statement , later. Form1040ez Substantial gainful activity. Form1040ez   Substantial gainful activity is the performance of significant duties over a reasonable period of time while working for pay or profit, or in work generally done for pay or profit. Form1040ez   Full-time work (or part-time work done at the employer's convenience) in a competitive work situation for at least the minimum wage conclusively shows that you are able to engage in substantial gainful activity. Form1040ez   Substantial gainful activity is not work you do to take care of yourself or your home. Form1040ez It is not unpaid work on hobbies, institutional therapy or training, school attendance, clubs, social programs, and similar activities. Form1040ez However, doing this kind of work may show that you are able to engage in substantial gainful activity. Form1040ez    Figure 5-B. Form1040ez Income Limits IF your filing status is. Form1040ez . Form1040ez . Form1040ez THEN even if you qualify (see Figure 5-A), you CANNOT take the credit if: Your adjusted gross income (AGI)* is equal to or more than. Form1040ez . Form1040ez . Form1040ez OR the total of your nontaxable social security and other nontaxable pension(s), annuities, or disability income is equal to or more than. Form1040ez . Form1040ez . Form1040ez single, head of household, or qualifying widow(er) with dependent child $17,500 $5,000 married filing jointly and only one spouse qualifies in Figure 5-A $20,000 $5,000 married filing jointly and both spouses qualify in Figure 5-A $25,000 $7,500 married filing separately and you lived apart from your spouse for all of 2013 $12,500 $3,750 *AGI is the amount on Form 1040A, line 22, or Form 1040, line 38      The fact that you have not worked for some time is not, of itself, conclusive evidence that you cannot engage in substantial gainful activity. Form1040ez Physician's statement. Form1040ez   If you are under age 65, you must have your physician complete a statement certifying that you were permanently and totally disabled on the date you retired. Form1040ez   You do not have to file this statement with your tax return, but you must keep it for your records. Form1040ez The Instructions for Schedule R (Form 1040A or 1040) include a statement your physician can complete and that you can keep for your records. Form1040ez Veterans. Form1040ez   If the Department of Veterans Affairs (VA) certifies that you are permanently and totally disabled, you can substitute VA Form 21-0172, Certification of Permanent and Total Disability, for the physician's statement you are required to keep. Form1040ez VA Form 21-0172 must be signed by a person authorized by the VA to do so. Form1040ez You can get this form from your local VA regional office. Form1040ez Physician's statement obtained in earlier year. Form1040ez   If you got a physician's statement in an earlier year and, due to your continued disabled condition, you were unable to engage in any substantial gainful activity during 2013, you may not need to get another physician's statement for 2013. Form1040ez For a detailed explanation of the conditions you must meet, see the instructions for Schedule R (Form 1040A or 1040), Part II. Form1040ez If you meet the required conditions, you must check the box on Schedule R (Form 1040A or 1040), Part II, line 2. Form1040ez   If you checked Schedule R (Form 1040A or 1040), Part I, box 4, 5, or 6, print in the space above the box in Part II, line 2, the first name(s) of the spouse(s) for whom the box is checked. Form1040ez Disability income. Form1040ez   If you are under age 65, you must also have taxable disability income to qualify for the credit. Form1040ez   Disability income must meet the following two requirements. Form1040ez It must be paid under your employer's accident or health plan or pension plan. Form1040ez It must be included in your income as wages (or payments in lieu of wages) for the time you are absent from work because of permanent and total disability. Form1040ez Payments that are not disability income. Form1040ez   Any payment you receive from a plan that does not provide for disability retirement is not disability income. Form1040ez Any lump-sum payment for accrued annual leave that you receive when you retire on disability is a salary payment and is not disability income. Form1040ez   For purposes of the credit for the elderly or the disabled, disability income does not include amounts you receive after you reach mandatory retirement age. Form1040ez Mandatory retirement age is the age set by your employer at which you would have had to retire had you not become disabled. Form1040ez Figuring the Credit You can figure the credit yourself, or the IRS will figure it for you. Form1040ez Figuring the credit yourself. Form1040ez   If you figure the credit yourself, fill out the front of Schedule R (Form 1040A or 1040). Form1040ez Next, fill out Schedule R (Form 1040A or 1040), Part III. Form1040ez Credit figured for you. Form1040ez   If you can take the credit and you want the IRS to figure the credit for you, see Publication 524 or the Instructions for Schedule R (Form 1040A or 1040). Form1040ez If you want the IRS to figure your tax, see chapter 30 of Publication 17, Your Federal Income Tax. Form1040ez Child and Dependent Care Credit You may be able to claim this credit if you pay someone to care for your dependent who is under age 13 or for your spouse or dependent who is not able to care for himself or herself. Form1040ez The credit can be up to 35% of your expenses. Form1040ez To qualify, you must pay these expenses so you can work or look for work. Form1040ez If you claim this credit, you must include on your return the name and taxpayer identification number (generally the social security number) of each qualifying person for whom care is provided. Form1040ez If the correct information is not shown, the credit may be reduced or disallowed. Form1040ez You also must show on your return the name, address, and the taxpayer identification number of the person(s) or organization(s) that provided the care. Form1040ez For more information, see Publication 503, Child and Dependent Care Expenses. Form1040ez Earned Income Credit (EIC) The earned income credit (EIC) is a refundable tax credit for certain people who work and have earned income under $51,567. Form1040ez The EIC is available to persons with or without a qualifying child. Form1040ez Credit has no effect on certain welfare benefits. Form1040ez   Any refund you receive because of the EIC cannot be counted as income when determining whether you or anyone else is eligible for benefits or assistance, or how much you or anyone else can receive, under any federal program or under any state or local program financed in whole or in part with federal funds. Form1040ez These programs include the following. Form1040ez Medicaid and supplemental security income (SSI). Form1040ez Supplemental Nutrition Assistance Program (food stamps). Form1040ez Low-income housing. Form1040ez Temporary Assistance for Needy Families (TANF). Form1040ez  In addition, when determining eligibility, the refund cannot be counted as a resource for at least 12 months after you receive it. Form1040ez Check with your local benefit coordinator to find out if your refund will affect your benefits. Form1040ez Do You Qualify for the Earned Income Credit (EIC)? Use Table 5-1 as an initial guide to the rules you must meet in order to qualify for the EIC. Form1040ez The specific rules you must meet depend on whether you have a qualifying child. Form1040ez If you have a qualifying child, the rules in Parts A, B, and D apply to you. Form1040ez If you do not have a qualifying child, the rules in Parts A, C, and D apply to you. Form1040ez  If, after reading all the rules in each part that applies to you, you think you may qualify for the credit, see Publication 596, Earned Income Credit, for more details about the EIC. Form1040ez You can also find information about the EIC in the instructions for Form 1040 (line 64a), Form 1040A (line 38a), or Form 1040EZ (line 8a). Form1040ez The sections that follow provide additional information for some of the rules. Form1040ez Adjusted gross income (AGI). Form1040ez   Under Rule 1, you cannot claim the EIC unless your AGI is less than the applicable limit shown in Part A of Table 5-1. Form1040ez Your AGI is the amount on line 37 (Form 1040), line 21 (Form 1040A), or line 4 (Form 1040EZ). Form1040ez Table 5-1. Form1040ez Earned Income Credit (EIC) in a Nutshell First, you must meet all the rules in this column. Form1040ez Second, you must meet all the rules in one of these columns, whichever applies. Form1040ez Third, you must meet the rule in this column. Form1040ez Part A. Form1040ez  Rules for Everyone Part B. Form1040ez  Rules If You Have a Qualifying Child Part C. Form1040ez  Rules If You Do Not Have a Qualifying Child Part D. Form1040ez  Figuring and Claiming the EIC 1. Form1040ez Your adjusted gross income (AGI) must be less than: •$46,227 ($51,567 for married filing jointly) if you have three or more qualifying children, •$43,038 ($48,378 for married filing jointly) if you have two qualifying children, •$37,870 ($43,210 for married filing jointly) if you have one qualifying child, or  •$14,340 ($19,680 for married filing jointly) if you do not have a qualifying child. Form1040ez 2. Form1040ez You must have a valid social security number. Form1040ez  3. Form1040ez Your filing status cannot be “Married filing separately. Form1040ez ” 4. Form1040ez You must be a U. Form1040ez S. Form1040ez citizen or resident alien all year. Form1040ez  5. Form1040ez You cannot file Form 2555 or Form 2555-EZ (relating to foreign earned income). Form1040ez  6. Form1040ez Your investment income must be $3,300 or less. Form1040ez  7. Form1040ez You must have earned income. Form1040ez 8. Form1040ez Your child must meet the relationship, age, residency, and joint return tests. Form1040ez  9. Form1040ez Your qualifying child cannot be used by more than one person to claim the EIC. Form1040ez  10. Form1040ez You generally cannot be a qualifying child of another person. Form1040ez 11. Form1040ez You must be at least age 25 but under age 65. Form1040ez  12. Form1040ez You cannot be the dependent of another person. Form1040ez  13. Form1040ez You generally cannot be a qualifying child of another person. Form1040ez  14. Form1040ez You must have lived in the United States more than half of the year. Form1040ez 15. Form1040ez Your earned income must be less than: •$46,227 ($51,567 for married filing jointly) if you have three or more qualifying children, •$43,038 ($48,378 for married filing jointly) if you have two qualifying children, •$37,870 ($43,210 for married filing jointly) if you have one qualifying child, or •$14,340 ($19,680 for married filing jointly) if you do not have a qualifying child. Form1040ez Social security number. Form1040ez   Under Rule 2, you (and your spouse if you are married filing jointly) must have a valid social security number (SSN) issued by the Social Security Administration (SSA). Form1040ez Any qualifying child listed on Schedule EIC also must have a valid SSN. Form1040ez (See Qualifying child , later, if you have a qualifying child. Form1040ez )   If your social security card (or your spouse's if you are married filing jointly) says “Not valid for employment” and your SSN was issued so that you (or your spouse) could get a federally funded benefit, you cannot get the EIC. Form1040ez An example of a federally funded benefit is Medicaid. Form1040ez Investment income. Form1040ez   Under Rule 6, you cannot claim the EIC unless your investment income is $3,300 or less. Form1040ez If your investment income is more than $3,300, you cannot claim the credit. Form1040ez For most people, investment income is the total of the following amounts. Form1040ez Taxable interest (line 8a of Form 1040 or 1040A). Form1040ez Tax-exempt interest (line 8b of Form 1040 or 1040A). Form1040ez Dividend income (line 9a of Form 1040 or 1040A). Form1040ez Capital gain net income (line 13 of Form 1040, if more than zero, or line 10 of Form 1040A). Form1040ez  If you file Form 1040EZ, your investment income is the total of the amount of line 2 and the amount of any tax-exempt interest you wrote to the right of the words “Form 1040EZ” on line 2. Form1040ez   For more information about investment income, see Publication 596, Earned Income Credit. Form1040ez Earned income. Form1040ez   Under Rule 7, you must have earned income to claim the EIC. Form1040ez Under Rule 15, you cannot claim the EIC unless your earned income is less than the applicable limit shown in Table 5-1, Part D. Form1040ez Earned income includes all of the following types of income. Form1040ez Wages, salaries, tips, and other taxable employee pay. Form1040ez Employee pay is earned income only if it is taxable. Form1040ez Nontaxable employee pay, such as certain dependent care benefits and adoption benefits, is not earned income. Form1040ez But there is an exception for nontaxable combat pay, which you can choose to include in earned income. Form1040ez Net earnings from self-employment. Form1040ez Gross income received as a statutory employee. Form1040ez Gross income defined. Form1040ez   Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). Form1040ez Do not include any social security benefits unless (a) you are married filing a separate tax return and you lived with your spouse at any time in 2013, or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly). Form1040ez If (a) or (b) applies, see the instructions for Form 1040, lines 20a and 20b to figure the taxable part of social security benefits you must include in gross income. Form1040ez Self-employed persons. Form1040ez   If you are self-employed and your net earnings are $400 or more, be sure to correctly fill out Schedule SE (Form 1040), Self-Employment Tax, and pay the proper amount of self-employment tax. Form1040ez If you do not, you may not get all the credit to which you are entitled. Form1040ez Disability benefits. Form1040ez   If you retired on disability, taxable benefits you receive under your employer's disability retirement plan are considered earned income until you reach minimum retirement age. Form1040ez Minimum retirement age generally is the earliest age at which you could have received a pension or annuity if you were not disabled. Form1040ez Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension and are not considered earned income. Form1040ez   Payments you received from a disability insurance policy that you paid the premiums for are not earned income. Form1040ez It does not matter whether you have reached minimum retirement age. Form1040ez If this policy is through your employer, the amount may be shown in box 12 of your Form W-2 with code J. Form1040ez Income that is not earned income. Form1040ez   Examples of items that are not earned income under Rule 7 include interest and dividends, pensions and annuities, social security and railroad retirement benefits (including disability benefits — except for payments covered under Disability benefits earlier), alimony and child support, welfare benefits, workers' compensation benefits, unemployment compensation (insurance), nontaxable foster care payments, and veterans' benefits, including VA rehabilitation payments. Form1040ez Do not include any of these items in your earned income. Form1040ez Workfare payments. Form1040ez   Nontaxable workfare payments are not earned income for the EIC. Form1040ez These are cash payments certain people receive from a state or local agency that administers public assistance programs funded under the federal Temporary Assistance for Needy Families (TANF) program in return for certain work activities such as (1) work experience activities (including remodeling or repairing public housing) if sufficient private sector employment is not available, or (2) community service program activities. Form1040ez Qualifying child. Form1040ez   Under Rule 8, your child is a qualifying child if your child meets four tests. Form1040ez The four tests are: Relationship, Age, Residency, and Joint return. Form1040ez   The four tests are illustrated in Figure 5-C. Form1040ez See Publication 596 for more information about each test. Form1040ez Figure 5-C. Form1040ez Tests for Qualifying Child A qualifying child for the EIC is a child who is your. Form1040ez . Form1040ez . Form1040ez Son, daughter, stepchild, foster child,  or a descendant of any of them (for example, your grandchild) OR Brother, sister, half brother, half sister, stepbrother,  stepsister, or a descendant of any of them (for example, your  niece or nephew) was . Form1040ez . Form1040ez . Form1040ez Under age 19 at the end of 2013 and younger than you (or your spouse if filing jointly) OR Under age 24 at the end of 2013, a student, and younger than you (or your spouse if filing jointly) OR Permanently and totally disabled at any time during the year, regardless of age who. Form1040ez . Form1040ez . Form1040ez Is not filing a joint return for 2013  (or is filing a joint return for 2013 only as a claim for refund of income tax withheld or estimated tax paid) who. Form1040ez . Form1040ez . Form1040ez Lived with you in the United States for more than half of 2013. Form1040ez  If the child did not live with you for the required time, see Publication 596 for more information. Form1040ez Figuring the EIC To figure the amount of your credit, you have two choices. Form1040ez Have the IRS figure the EIC for you. Form1040ez If you want to do this, see IRS Will Figure the EIC for You in Publication 596. Form1040ez Figure the EIC yourself. Form1040ez If you want to do this, see How To Figure the EIC Yourself in Publication 596. Form1040ez Prev  Up  Next   Home   More Online Publications
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Tips for Leasing a Car

When you lease, you pay to drive someone else's vehicle. Monthly lease payments may be lower than loan payments, but at the end of the lease you have no ownership or equity in the car. To get the best deal, follow the advice below in addition to the general suggestions for buying a car.

  • To help you compare leasing versus owning, the Consumer Leasing Act requires leasing companies to give you information on monthly payments and other charges. Check out Leaseguide.com, and Leasecompare.com for online information on leases including current lease deals.
  • Consider using an independent agent rather than the dealer. You might find a better deal. Most financial institutions that offer auto financing also offer leasing options.
  • Ask for details on wear and tear standards. Dings that you regard as normal wear and tear could be billed as significant damage at the end of your lease.
  • Find out how many miles you can drive in a year. Most leases allow 12,000 to 15,000 miles a year. Expect a charge of 10 to 25 cents for each additional mile.
  • Check the manufacturer's warranty. It should cover the entire lease term and the number of miles you are likely to drive.
  • Ask the dealer what happens if you give up the car before the end of your lease. There may be extra fees for doing so.
  • Ask what happens if the car is involved in an accident.
  • Get all the terms in writing. Everything included with the car should be listed on the lease to avoid being charged for "missing" equipment later.

The Federal Reserve Board of Governors offers a consumer guide to auto leasing.

Financing

Most car buyers today need some form of financing to purchase a new vehicle. Many use direct lending, that is, a loan from a finance company, bank, or credit union. In direct lending, a buyer agrees to pay the amount financed, plus an agreed-upon finance charge, over a specified period. Once a buyer and a vehicle dealership enter into a contract to purchase a vehicle, the buyer uses the loan proceeds from the direct lender to pay the dealership for the vehicle. Another common form is dealership financing, which offers convenience, financing options, and sometimes special, manufacturer-sponsored, low-rate deals. Before you make a financing decision, it's important to do your research:

  • Decide in advance how much you can afford to spend and stick to your limit.
  • Get a copy of your credit report and correct any errors before applying for a loan.
  • Check buying guides to identify price ranges and best available deals.

Credit and Sublease Brokers

Con artists often prey on people who have bad credit and who cannot get car loans. "Credit brokers" promise to get a loan for you in exchange for a high fee. In many cases, the "broker" takes the fee and disappears. "Sublease brokers" charge a fee to arrange for you to "sublease" or "take over" someone else's car lease or loan. Such deals usually violate the original loan or lease agreement. Your car can be repossessed even if you've made all of your payments. You also might have trouble insuring your car.

The Form1040ez

Form1040ez Internal Revenue Bulletin:  2013-7  February 11, 2013  Rev. Form1040ez Proc. Form1040ez 2013-16 Table of Contents SECTION 1. Form1040ez PURPOSE SECTION 2. Form1040ez BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE SECTION 3. Form1040ez BACKGROUND—APPLICABLE PROVISIONS OF LAW SECTION 4. Form1040ez FEDERAL INCOME TAX TREATMENT SECTION 5. Form1040ez INFORMATION-REPORTING OBLIGATIONS SECTION 6. Form1040ez HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA SECTION 7. Form1040ez PENALTY RELIEF FOR 2012 SECTION 8. Form1040ez SCOPE AND EFFECTIVE DATE SECTION 9. Form1040ez DRAFTING INFORMATION SECTION 1. Form1040ez PURPOSE This revenue procedure provides guidance to mortgage loan holders, loan servicers, and borrowers who are participating in the Department of the Treasury’s (Treasury) and Department of Housing and Urban Development’s (HUD) Home Affordable Modification Program® (HAMP®). Form1040ez Under HAMP, a borrower may be eligible for principal reduction of the outstanding balance of a qualifying mortgage pursuant to the program’s Principal Reduction AlternativeSM (PRA). Form1040ez In appropriate cases, HAMP has been offering the PRA as part of a HAMP loan modification since the last quarter of 2010. Form1040ez Current plans call for HAMP to continue accepting new borrowers through the end of 2013. Form1040ez The Internal Revenue Service (Service) is providing this guidance to address the tax consequences for borrowers (HAMP-PRA borrowers) who are participating in the PRA and the reporting obligations for participating mortgage loan holders and servicers. Form1040ez SECTION 2. Form1040ez BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE . Form1040ez 01 To help distressed borrowers lower their monthly mortgage payments, Treasury and HUD established HAMP for mortgage loans that are not owned or guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). Form1040ez A description of the program can be found at www. Form1040ez makinghomeaffordable. Form1040ez gov. Form1040ez . Form1040ez 02 Under HAMP, a participating loan servicer, acting on behalf of the mortgage loan holder, must consider a sequence of modification steps for each eligible borrower’s mortgage loan until the borrower’s monthly payment is reduced to a monthly payment amount determined under the HAMP guidelines. Form1040ez These steps include a reduction in the mortgage loan’s interest rate, an extension of the mortgage loan’s term, and a reduction in the mortgage loan’s principal balance. Form1040ez . Form1040ez 03 In some cases, the unpaid principal balance of the modified mortgage loan is divided into (1) an amount that bears stated interest and that is used to calculate the borrower’s new monthly mortgage payment (the “Non-forbearance Portion”), and (2) a forbearance amount, which does not bear stated interest and on which periodic payments of stated principal are not required. Form1040ez The stated principal of the forbearance amount is due upon the earliest of the borrower’s transfer of the property, payoff of the balance on the Non-forbearance Portion of the mortgage loan, or maturity of the mortgage loan. Form1040ez However, as noted in section 2. Form1040ez 06 of this revenue procedure, a HAMP-PRA borrower sometimes may not have to pay all or a portion of the forbearance amount. Form1040ez (The forbearance amount associated with a HAMP-PRA principal reduction is called the “PRA Forbearance Amount. Form1040ez ”) . Form1040ez 04 If a mortgage loan is being considered for a HAMP modification and the amount owed on the mortgage loan is greater than 115 percent of the value of the property, then the servicer must consider whether principal reduction under PRA should be used as part of the HAMP modification. Form1040ez . Form1040ez 05 The first step toward a HAMP modification is a trial period plan, in which the borrower’s monthly mortgage payment is set at a monthly payment amount determined under the HAMP guidelines. Form1040ez The trial period plan effective date is the due date for the first of the reduced payments that are to be made under the trial period plan. Form1040ez (It is the first day of either the first or the second month after the servicer transmits the trial period notice to the borrower. Form1040ez ) In general, the trial period is three months, and, during this period, the borrower must satisfy certain conditions before the changes to the terms of the mortgage loan become permanent (the “Trial Period Conditions”). Form1040ez Specifically, depending on the borrower’s trial period payment history, the borrower’s compliance with HAMP and servicer guidelines, and his or her satisfaction of all other Trial Period Conditions, the borrower will be offered a permanent modification of the terms of the mortgage loan, including monthly mortgage payments that are lower than those under the old mortgage loan. Form1040ez Until the effective date of a permanent modification, the terms of the existing mortgage loan continue to apply. Form1040ez . Form1040ez 06 After the mortgage loan is permanently modified under HAMP, if the modified mortgage loan is in good standing on the first, second, or third annual anniversary of the trial period plan effective date (the “Three-year Period”), the servicer must reduce the unpaid principal balance of the mortgage loan on the respective anniversary date by one-third of the initial PRA Forbearance Amount. Form1040ez (The servicer allocates the entire reduction to the remaining PRA Forbearance Amount. Form1040ez ) In general, if a HAMP-PRA borrower’s mortgage loan is in good standing and if the HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan prior to the reduction of the entire PRA Forbearance Amount, the servicer must reduce the remaining outstanding principal balance of the mortgage loan by the remaining PRA Forbearance Amount. Form1040ez . Form1040ez 07 In connection with every HAMP loan modification, the HAMP program administrator (acting on behalf of the federal government) provides incentives to the borrower, the servicer, and the investor (that is, the holder of the mortgage loan). Form1040ez If a HAMP loan modification includes a PRA principal reduction, the HAMP program administrator makes additional incentive payments to the investor. Form1040ez These additional incentives are called “PRA Investor Incentive Payments” and are generally spread over three years. Form1040ez The size of the PRA Investor Incentive Payments depends on the amount of principal reduced, the loan-to-value ratio at the time of the HAMP modification, and the loan’s payment history before the modification. Form1040ez The PRA Investor Incentive Payments range from 18 to 63 percent of the principal amounts reduced. Form1040ez For purposes of this revenue procedure, the excess of the initial PRA Forbearance Amount of a mortgage loan over the aggregate PRA Investor Incentive Payments scheduled to be paid with respect to that loan is called the “PRA Adjusted Forbearance Amount. Form1040ez ” . Form1040ez 08 A PRA Investor Incentive Payment is earned by the investor on each date on which the servicer reduces the unpaid principal balance of the mortgage loan by a portion of the PRA Forbearance Amount (generally, on the first three annual anniversaries of the trial period plan effective date). Form1040ez . Form1040ez 09 If a HAMP-PRA borrower’s early payment in full of the Non-forbearance Portion of the mortgage loan accelerates the reduction of the remaining PRA Forbearance Amount (described above in section 2. Form1040ez 06 of this revenue procedure), the remaining PRA Investor Incentive Payments from the HAMP program administrator are also accelerated. Form1040ez . Form1040ez 10 If, prior to completion of the Three-year Period, a mortgage loan ceases to be in good standing because of the HAMP-PRA borrower’s payment history, then the remaining PRA Forbearance Amount is not further reduced and is due when the HAMP-PRA borrower transfers the property, the HAMP-PRA borrower refinances, or otherwise pays off the Non-forbearance Portion of the mortgage loan, or the mortgage loan matures. Form1040ez SECTION 3. Form1040ez BACKGROUND—APPLICABLE PROVISIONS OF LAW . Form1040ez 01 Under § 61 of the Internal Revenue Code, except as otherwise provided in subtitle A, gross income means all income from whatever source derived, including income from discharge of indebtedness. Form1040ez See § 61(a)(12). Form1040ez . Form1040ez 02 Under § 1. Form1040ez 1001-3 of the Income Tax Regulations, if a debt instrument undergoes a significant modification, then the modification results in an exchange of the original debt instrument for the modified debt instrument. Form1040ez In general, an agreement to change a term of a debt instrument is a modification at the time the borrower and holder enter into the agreement, even if the change in term is not immediately effective. Form1040ez However, if the change is conditioned on reasonable closing conditions, a modification occurs on the closing date of the agreement. Form1040ez See § 1. Form1040ez 1001-3(c)(6). Form1040ez . Form1040ez 03 Under § 108(e)(10), in the case of a debt-for-debt exchange (including a deemed exchange under § 1. Form1040ez 1001-3), the borrower is treated as having satisfied the original debt instrument with an amount of money equal to the issue price of the new debt instrument. Form1040ez If the amount of debt satisfied in this manner exceeds that issue price, the borrower realizes discharge of indebtedness income on the exchange. Form1040ez See also § 1. Form1040ez 61-12(c). Form1040ez . Form1040ez 04 The issue price of a non-publicly traded debt instrument issued for non-publicly traded property generally reflects the amount of principal that the borrower is required to pay to the holder of the instrument. Form1040ez If a borrower has the ability to avoid paying certain amounts (including principal) without violating the terms of the instrument, the payment schedule for the instrument is generally determined based on an assumption that the borrower will avoid any requirement to make those payments. Form1040ez See, e. Form1040ez g. Form1040ez , §§ 1. Form1040ez 1272-1(c)(5) and 1. Form1040ez 1274-2(d). Form1040ez . Form1040ez 05 Under § 108(a), gross income does not include any amount that but for § 108(a) would be includible in gross income by reason of the discharge (in whole or in part) of a taxpayer’s indebtedness if (1) the indebtedness discharged is qualified principal residence indebtedness that is discharged before January 1, 2014, or (2) the discharge occurs when the taxpayer is insolvent. Form1040ez Section 108(a)(1)(E) and 108(a)(1)(B). Form1040ez (Although § 108 contains other exclusions as well, this revenue procedure focuses on these two exclusions because they are the most likely to apply to the greatest number of HAMP-PRA borrowers. Form1040ez ) . Form1040ez 06 Under §§ 108(h) and 163(h)(3)(B), qualified principal residence indebtedness is any indebtedness that is incurred by a borrower to buy, build, or substantially improve the borrower’s principal residence and is secured by that residence. Form1040ez . Form1040ez 07 Qualified principal residence indebtedness also includes a loan secured by the borrower’s principal residence that refinances qualified principal residence indebtedness, but only to the extent of the amount of the refinanced indebtedness. Form1040ez See §§ 108(h) and 163(h)(3)(B)(i). Form1040ez . Form1040ez 08 The maximum amount of discharged indebtedness that a borrower may exclude from gross income under the qualified principal residence indebtedness exclusion is $2,000,000 ($1,000,000 for a married individual filing a separate return). Form1040ez Under § 108(h)(4), if only part of the discharged indebtedness is qualified principal residence indebtedness, then the exclusion applies only to the amount of the discharged indebtedness that exceeds the amount of the loan (determined immediately before the discharge) that is not qualified principal residence indebtedness. Form1040ez . Form1040ez 09 Under § 108(a)(3), the insolvency exclusion applies to the lesser of the amount of the debt discharged or the amount by which the taxpayer is insolvent immediately before the discharge. Form1040ez . Form1040ez 10 Section 108(d)(3) provides that, for purposes of the insolvency exclusion, a taxpayer is insolvent to the extent that the taxpayer’s total liabilities exceed the fair market value of all of the taxpayer’s assets immediately before the discharge of indebtedness. Form1040ez Under § 108(a)(2)(C), the qualified principal residence indebtedness exclusion takes precedence over the insolvency exclusion when both exclusions apply to discharged indebtedness, unless the taxpayer elects to apply the insolvency exclusion. Form1040ez . Form1040ez 11 If an amount is excluded from gross income as a discharge of qualified principal residence indebtedness, the taxpayer must reduce the basis of the taxpayer’s principal residence. Form1040ez See § 108(h)(1). Form1040ez If a discharged amount is excluded from gross income because the taxpayer was insolvent when the discharge occurred, the taxpayer must reduce certain tax attributes (possibly including basis). Form1040ez See § 108(b). Form1040ez For further discussion of income from the discharge of indebtedness, the qualified principal residence indebtedness exclusion, the insolvency exclusion, and other exclusions from gross income that may apply, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Form1040ez . Form1040ez 12 Taxpayers who exclude any discharged amounts from gross income report both the exclusion and the resulting reduction in basis or other tax attributes on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). Form1040ez See Form 982 instructions and Publication 4681. Form1040ez This form is to be filed with the tax return for the taxable year in which the amount is discharged but is excluded from gross income. Form1040ez . Form1040ez 13 Governmental payments made to or on behalf of individuals or other persons are included within the broad definition of gross income under § 61 unless an exception applies. Form1040ez See Notice 2003-18, 2003-1 C. Form1040ez B. Form1040ez 699, and Rev. Form1040ez Rul. Form1040ez 79-356, 1979-2 C. Form1040ez B. Form1040ez 28. Form1040ez However, if disbursements are made by a governmental unit to individuals in the interest of the general welfare (that is, are generally based on individual or family need) and the disbursements do not represent compensation for services, then the amounts disbursed are excluded from the income of the recipient (general welfare exclusion). Form1040ez See Rev. Form1040ez Rul. Form1040ez 2005-46, 2005-2 C. Form1040ez B. Form1040ez 120, and Rev. Form1040ez Rul. Form1040ez 75-246, 1975-1 C. Form1040ez B. Form1040ez 24. Form1040ez . Form1040ez 14 Under § 451 and § 1. Form1040ez 451-1(a), a taxpayer that uses the cash receipts and disbursements method of accounting includes income in gross income when the taxpayer actually or constructively receives the income. Form1040ez . Form1040ez 15 Section 6041 requires every person engaged in a trade or business (including the United States and its agencies) to (1) file an information return (Form 1099-MISC, Miscellaneous Income, is used for this purpose) for each calendar year in which the person makes, in the course of its trade or business, payments to another person of fixed or determinable income aggregating $600 or more, and (2) furnish a copy of the information return to that other person. Form1040ez See § 6041(a) and (d) and § 1. Form1040ez 6041-1(a)(1) and (b). Form1040ez . Form1040ez 16 Section 6050P requires applicable entities (including the United States and its agencies, financial entities, and any organization a significant trade or business of which is the lending of money) to (1) file an information return (Form 1099-C, Cancellation of Debt, is used for this purpose) for each calendar year in which it discharges indebtedness of another person of $600 or more, and (2) furnish a copy of the information return to that other person. Form1040ez See § 6050P(a)-(c) and §§ 1. Form1040ez 6050P-1(a) and 1. Form1040ez 6050P-2(a) and (d). Form1040ez . Form1040ez 17 Section 6721 imposes penalties with respect to information returns required to be filed with the Service. Form1040ez These penalties apply in the case of a failure to timely file an information return, a failure to include all required information on the return, or the inclusion of incorrect information on the return. Form1040ez Section 6724(d)(1) includes Forms 1099-MISC and 1099-C in the term “information return. Form1040ez ” . Form1040ez 18 Section 6722 imposes penalties with respect to payee statements required to be furnished to payees. Form1040ez These penalties apply in the case of a failure to timely furnish a payee statement, a failure to include all required information on the statement, or the inclusion of incorrect information on the payee statement. Form1040ez Section 6724(d)(2) includes in the term “payee statement” copies of Forms 1099-MISC and 1099-C that are required to be furnished to taxpayers. Form1040ez SECTION 4. Form1040ez FEDERAL INCOME TAX TREATMENT . Form1040ez 01 Because a HAMP modification with a PRA principal reduction is a significant modification, it results in a deemed debt-for-debt exchange in which the HAMP-PRA borrower satisfies the old mortgage loan by issuing a new one. Form1040ez See § 1. Form1040ez 1001-3. Form1040ez At the time of the modification, therefore, under § 108 and this revenue procedure, the HAMP-PRA borrower realizes discharge of indebtedness income equal to any excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new (post-modification) mortgage loan. Form1040ez See also § 61(a)(12) and § 1. Form1040ez 61-12(c). Form1040ez . Form1040ez 02 A HAMP-PRA borrower has the ability to avoid payment of the PRA Adjusted Forbearance Amount. Form1040ez Because the HAMP-PRA borrower has this ability, that amount should not be taken into account in determining the issue price of the new mortgage loan. Form1040ez Because the issue price of the new mortgage loan does not include the PRA Adjusted Forbearance Amount, the PRA Adjusted Forbearance Amount contributes to the excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new mortgage loan. Form1040ez . Form1040ez 03 On the other hand, the investor has not given up its right to receive the remainder of the PRA Forbearance Amount, because the HAMP program administrator is expected to make those payments on the HAMP-PRA borrower’s behalf by making the PRA Investor Incentive Payments. Form1040ez Because the remainder of the PRA Forbearance Amount is payable in this manner, that remainder is included in the issue price of the new mortgage loan. Form1040ez . Form1040ez 04 The Trial Period Conditions are reasonable closing conditions that must be satisfied before the changes to the terms of the mortgage loan become permanent. Form1040ez Therefore, for purposes of § 1. Form1040ez 1001-3, the date of the modification is the date of the permanent modification. Form1040ez . Form1040ez 05 Unless an exclusion applies, the HAMP-PRA borrower includes in gross income the discharge of indebtedness income described in section 4. Form1040ez 01 of this revenue procedure for the taxable year in which the permanent modification occurs. Form1040ez Under certain conditions, however, section 6 of this revenue procedure permits a borrower to report the discharge of indebtedness under HAMP-PRA over the Three-year Period. Form1040ez The qualified principal residence indebtedness exclusion under § 108(a)(1)(E) and the insolvency exclusion under § 108(a)(1)(B) are two exclusions that may apply to the discharge. Form1040ez . Form1040ez 06 The PRA Investor Incentive Payment is treated as a payment on the mortgage loan by the HAMP program administrator on behalf of the HAMP-PRA borrower. Form1040ez . Form1040ez 07 To the extent that the HAMP-PRA borrower uses the property as the HAMP-PRA borrower’s principal residence or the property is occupied by the HAMP-PRA borrower’s legal dependent, parent, or grandparent without rent being charged or collected, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the PRA Investor Incentive Payments that the HAMP program administrator makes to the investor in the mortgage loan. Form1040ez This is consistent with Rev. Form1040ez Rul. Form1040ez 2009-19, 2009-28 I. Form1040ez R. Form1040ez B. Form1040ez 111, which addressed the treatment of Pay-for-Performance Success Payments. Form1040ez . Form1040ez 08 To the extent that the HAMP-PRA borrower uses the property as a rental property or holds the property vacant and available for rent, the HAMP-PRA borrower includes PRA Investor Incentive Payments in gross income. Form1040ez If the HAMP-PRA borrower uses the cash receipts and disbursements method of accounting, then the HAMP-PRA borrower includes a PRA Investor Incentive Payment in gross income in the taxable year in which it is applied as a payment on the HAMP-PRA borrower’s mortgage loan. Form1040ez . Form1040ez 09 As described in section 2. Form1040ez 09 of this revenue procedure, if a HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan while the loan is in good standing and prior to completion of the Three-year Period, that payment accelerates both the reduction in the remaining PRA Forbearance Amount and the PRA Investor Incentive Payments from the HAMP program administrator. Form1040ez To the extent that the HAMP-PRA borrower is described in section 4. Form1040ez 07 of this revenue procedure, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the accelerated PRA Investor Incentive Payments. Form1040ez To the extent that the HAMP-PRA borrower is described in section 4. Form1040ez 08 of this revenue procedure, the HAMP-PRA borrower includes in income in the year of the acceleration the remaining amount of the PRA Investor Incentive Payment. Form1040ez SECTION 5. Form1040ez INFORMATION-REPORTING OBLIGATIONS . Form1040ez 01 Under § 6050P, the investor is required to file a Form 1099-C with respect to a borrower who realizes discharge of indebtedness of $600 or more. Form1040ez A copy of this form is required to be furnished to the borrower. Form1040ez . Form1040ez 02 As stated in sections 4. Form1040ez 01 and 4. Form1040ez 04 of this revenue procedure, the HAMP-PRA discharge of indebtedness is realized at the time of the permanent modification of the mortgage loan. Form1040ez . Form1040ez 03 An investor is an applicable entity that is required under § 1. Form1040ez 6050P-1 and this revenue procedure to issue a Form 1099-C for discharge of indebtedness. Form1040ez Under § 1. Form1040ez 6050P-1(b)(2)(F), the permanent modification of a mortgage loan is an identifiable event. Form1040ez Identifiable events determine when Forms 1099-C have to be issued. Form1040ez Thus, the Form 1099-C is issued for the calendar year in which the permanent mortgage loan modification occurs. Form1040ez This rule under § 1. Form1040ez 6050P-1(b)(2)(F) applies even if, under section 6 of this revenue procedure, the HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the times when the unpaid principal balance of the new mortgage loan is reduced. Form1040ez . Form1040ez 04 The investor (or the loan servicer acting on behalf of the investor) reports the full amount of the discharge on the Form 1099-C regardless of whether some or all of the amount is excludible from income under the qualified principal residence indebtedness exclusion, the insolvency exclusion, or any other exclusion that may apply. Form1040ez That discharged amount will generally be the PRA Adjusted Forbearance Amount (which does not include the amounts expected to be satisfied by PRA Investor Incentive Payments). Form1040ez . Form1040ez 05 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. Form1040ez 07 of this revenue procedure, the PRA Investor Incentive Payments are excluded from the gross income of the HAMP-PRA borrower, and thus they are not fixed or determinable income to the HAMP-PRA borrower. Form1040ez Under § 6041, these payments are not subject to information reporting. Form1040ez See Notice 2011-14, 2011-11 I. Form1040ez R. Form1040ez B. Form1040ez 544, 546. Form1040ez . Form1040ez 06 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. Form1040ez 08 of this revenue procedure, the PRA Investor Incentive Payments are includible in gross income as fixed or determinable income in the taxable year required by the HAMP-PRA borrower’s method of accounting. Form1040ez The payment is subject to the information reporting requirements of § 6041, as described in section 3. Form1040ez 15 of this revenue procedure. Form1040ez Accordingly, the HAMP program administrator is required to issue a Form 1099-MISC reporting the PRA Investor Incentive Payment. Form1040ez SECTION 6. Form1040ez HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA . Form1040ez 01 In general. Form1040ez The HAMP-PRA program began in the last quarter of 2010, and since that time there has been uncertainty about whether the amount of the discharge of indebtedness should be reported in the year of the permanent modification or over the Three-year Period (when the unpaid principal balance on the new mortgage loan is reduced). Form1040ez As a result, some HAMP-PRA borrowers have been reporting the discharge of indebtedness under HAMP-PRA over the Three-year Period. Form1040ez Given the temporary nature of the program and the issuance of this guidance after participation in the program has begun, in the interests of equitable and sound tax administration, HAMP-PRA borrowers may report discharges of indebtedness under HAMP-PRA under the rules in this section 6. Form1040ez A HAMP-PRA borrower may choose to report discharges of indebtedness under HAMP-PRA pursuant to the rules in this section 6 only if the borrower applies the same borrower option under section 6. Form1040ez 02 of this revenue procedure consistently to the taxable year of the permanent modification and to all subsequent taxable years. Form1040ez Thus, a HAMP-PRA borrower may not choose a borrower option under section 6. Form1040ez 02 of this revenue procedure if a statute of limitations has expired for any of the taxable years that are necessary for consistent application of that option. Form1040ez . Form1040ez 02 HAMP-PRA borrower options. Form1040ez A HAMP-PRA borrower may treat the HAMP-PRA discharge as being realized in either of the following ways— (1) One hundred percent of the PRA Adjusted Forbearance Amount at the time of the permanent modification; or (2) One third of the PRA Adjusted Forbearance Amount on each of the first three annual anniversaries of the trial period plan effective date (described in section 2. Form1040ez 06 of this revenue procedure), when, as required by the terms of the new mortgage loan, the servicer reduces the unpaid principal balance of the new mortgage loan. Form1040ez If some or all of the reduction in the unpaid principal balance is accelerated (as described in section 2. Form1040ez 06 of this revenue procedure) because the HAMP-PRA borrower prepays the Non-forbearance Portion of the mortgage loan, then the HAMP-PRA discharge represented by the amount of the reduction that was accelerated is treated as being realized at the time of the accelerated reduction. Form1040ez . Form1040ez 03 HAMP-PRA borrowers who choose to realize the HAMP-PRA discharge at the time of the permanent modification. Form1040ez (1) If a HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the time of the permanent modification, then for the taxable year in which the permanent modification occurs, the HAMP-PRA borrower reports on Form 982 the amount, if any, of the discharge that is excluded from gross income and includes in gross income any remaining discharge. Form1040ez (2) If a HAMP-PRA borrower’s mortgage loan was permanently modified under HAMP in 2010 or 2011, and if the borrower was reporting the discharge of indebtedness using the method described in section 6. Form1040ez 02(2) of this revenue procedure, then the borrower may change to reporting the discharge of indebtedness using the method described in section 6. Form1040ez 02(1) of this revenue procedure by filing a 2012 Form 982 with the borrower’s timely filed (with extensions) 2012 income tax return. Form1040ez This section 6. Form1040ez 03(2) applies only if the change to reporting the discharge using the method described in section 6. Form1040ez 02(1) of this revenue procedure does not change the borrower’s federal income tax liability (including any change in federal income tax liability due to a change in basis or tax attributes (under § 108(h)(1) or § 108(b))) for any taxable year prior to the borrower’s 2012 taxable year. Form1040ez To make this change, the borrower must— (i) Compute the amount of discharge of indebtedness that would be included in income under § 61(a)(12) or excluded from gross income under § 108, basing the computation of the discharge on the facts as of the year of the permanent modification; and (ii) Report on a 2012 Form 982 the reduction in basis or tax attributes (under § 108(h)(1) or § 108(b)) due to the permanent modification that the borrower would have reported on the Form 982 for the taxable year of the permanent modification, minus any reductions due to the permanent modification that the borrower actually reported on Forms 982 for taxable years prior to 2012. Form1040ez (3) Example. Form1040ez The following example illustrates the application of section 6. Form1040ez 03(2) of this revenue procedure. Form1040ez In 2010, B’s basis in B’s principal residence was $330,000. Form1040ez In 2010, B’s mortgage loan on the principal residence is permanently modified under HAMP-PRA. Form1040ez B realized $30,000 of cancellation of indebtedness from the permanent modification, all of which qualifies for the exclusion from income for qualified principal residence indebtedness under § 108(a)(1)(E). Form1040ez The trial period plan effective date also fell in 2010. Form1040ez B’s federal income tax return for 2010 was consistent with B’s reporting this discharge of indebtedness using the method described in section 6. Form1040ez 02(2) of this revenue procedure. Form1040ez That is, B’s 2010 return did not include income from discharge of indebtedness under HAMP-PRA, nor did the return contain a Form 982 reporting exclusion of any such discharge of indebtedness. Form1040ez The next year, B reported on line 10(b) of the 2011 Form 982 that B filed with B’s 2011 federal income tax return a $10,000 reduction in basis in the principal residence. Form1040ez For 2012, B chooses to change to reporting the discharge of indebtedness using the method described in section 6. Form1040ez 02(1) of this revenue procedure. Form1040ez Thus, B files a 2012 Form 982 with B’s timely filed (including extensions) 2012 federal income tax return, and on line 10(b) of that form, B reports a $20,000 basis reduction in the principal residence ($30,000 basis reduction that B would have excluded from income in 2010 using the method described in section 6. Form1040ez 02(1) of this revenue procedure, minus the $10,000 basis reduction that B reported on B’s 2011 Form 982). Form1040ez (4) If a HAMP-PRA borrower reports the entire HAMP-PRA discharge using the method described in section 6. Form1040ez 02(1) of this revenue procedure, and if that HAMP-PRA borrower’s mortgage loan ceases to be in good standing during the Three-year Period as described in section 2. Form1040ez 10 of this revenue procedure, then some or all of the anticipated reductions in the PRA Adjusted Forbearance Amount will not take place. Form1040ez Because the amount of these anticipated reductions was not included in determining the issue price of the new mortgage loan that, pursuant to § 1. Form1040ez 1001-3, the HAMP-PRA borrower is deemed to issue in satisfaction of the old mortgage loan, the issue price of the new mortgage loan was understated. Form1040ez Under these circumstances, the discharge of indebtedness income determined as of the date of the permanent modification will have been overstated. Form1040ez (5) The Service will not challenge a HAMP-PRA borrower who is described in section 6. Form1040ez 03(4) of this revenue procedure and who takes the following corrective measures: (i) If a HAMP-PRA borrower included any of the discharge of indebtedness in gross income, the HAMP-PRA borrower may file an amended return that does not include the amount of the discharge of indebtedness that was previously reported as gross income but that, because of the HAMP-PRA borrower’s failure to keep the new mortgage loan in good standing, was not ultimately discharged. Form1040ez The amended return should be for the taxable year in which the income was included (that is, the year of the permanent modification), provided the applicable statute of limitations remains open for that taxable year. Form1040ez (ii) If the HAMP-PRA borrower did not include any of the discharge of indebtedness in gross income (that is, if the HAMP-PRA borrower excluded all of it), the HAMP-PRA borrower may file a new Form 982 that the Service will treat as superseding the earlier Form 982. Form1040ez The new Form 982 will reflect the revised reduction in basis or in tax attributes (under § 108(h)(1) or § 108(b)). Form1040ez The new Form 982 should be the Form 982 for the year of the permanent modification and should be filed with the return for the taxable year in which the HAMP-PRA borrower’s mortgage loan ceased to be in good standing. Form1040ez . Form1040ez 04 HAMP-PRA borrowers who choose to treat the HAMP-PRA discharge as being realized on the dates on which the unpaid principal balance of the mortgage loan is reduced. Form1040ez (1) If a HAMP-PRA borrower chooses to realize the HAMP-PRA discharge at the times that the unpaid principal balance on the new mortgage loan is reduced, instead of at the time of the permanent modification, then the HAMP-PRA borrower’s federal income tax returns for the taxable year that contains the permanent modification and for the subsequent taxable years must not treat any of the discharge as being realized at the time of the permanent modification and must treat the entire HAMP-PRA discharge as being realized in the amounts—and at the times—of the reductions in the unpaid principal balance. Form1040ez Except as described in the last sentence of this paragraph, therefore, the income tax return for the year of the permanent modification must include no gross income from—nor report on Form 982 an exclusion of—any amount of the HAMP-PRA discharge. Form1040ez Instead, the HAMP-PRA discharge is included in gross income (or is reported on Form 982 as excluded from gross income) in the subsequent years in which the unpaid principal balance is reduced. Form1040ez If the first such reduction occurs in the year of the permanent modification, however, then the amount of any such reduction is reflected as an inclusion or exclusion on the federal income tax return for that year. Form1040ez (2) A HAMP-PRA borrower who has been using the method described in section 6. Form1040ez 02(1) of this revenue procedure may change to the method described in section 6. Form1040ez 02(2) but must comply with the consistency and open-year requirements described in section 6. Form1040ez 01 of this revenue procedure. Form1040ez SECTION 7. Form1040ez PENALTY RELIEF FOR 2012 . Form1040ez 01 The Service will not assert penalties under § 6721 or § 6722 against an investor for failing to timely file and furnish a 2012 Form 1099-C as required by section 5. Form1040ez 03 through 5. Form1040ez 04 and section 8. Form1040ez 02 of this revenue procedure with respect to discharge of indebtedness resulting from HAMP-PRA permanent modifications that take place during calendar year 2012 if the following requirements are satisfied: (1) Not later than February 28, 2013, a statement is sent to the HAMP-PRA borrower containing the following: (a) The HAMP-PRA borrower’s name, address, and taxpayer identification number; and (b) The date and amount of the discharge of indebtedness (as described in sections 4. Form1040ez 01 through 4. Form1040ez 04 of this revenue procedure) that is required to be reported for 2012. Form1040ez (2) Not later than March 28, 2013, a statement is sent to the Service. Form1040ez It must be in the form of a single statement that separately lists for each HAMP-PRA borrower the information specified in section 7. Form1040ez 01(1) of this revenue procedure. Form1040ez The statement should be sent to the Service at the following address: Internal Revenue Service Center Stop 6728AUSC Austin, TX 73301 . Form1040ez 02 The Service will not assert penalties under § 6721 or § 6722 with respect to any Forms 1099-MISC for 2012 that sections 5. Form1040ez 06 and 8. Form1040ez 02 of this revenue procedure require to be filed with the Service and furnished to taxpayers. Form1040ez . Form1040ez 03 Section 8. Form1040ez 03 and 8. Form1040ez 04 of this revenue procedure, below, describes penalty relief regarding Forms 1099-C and 1099-MISC for 2010 and 2011. Form1040ez SECTION 8. Form1040ez SCOPE AND EFFECTIVE DATE . Form1040ez 01 This revenue procedure applies to all borrowers, investors, and servicers who participate, or have participated, in the HAMP-PRA, regardless of when the permanent modification occurs. Form1040ez . Form1040ez 02 Section 5 of this revenue procedure is effective for Forms 1099-C and 1099-MISC due or filed after January 24, 2013. Form1040ez . Form1040ez 03 Because of the effective date in section 8. Form1040ez 02 of this revenue procedure, an investor is not subject to penalties under § 6721 or § 6722 on the grounds that the investor failed to timely file and furnish a 2010 or 2011 Form 1099-C as described in section 5. Form1040ez 03 through 5. Form1040ez 04 of this revenue procedure (or on the grounds that the investor filed or furnished a 2010 or 2011 Form 1099-C that is inconsistent with section 5. Form1040ez 03 through 5. Form1040ez 04 of this revenue procedure), provided that the investor demonstrates a good faith attempt to comply with the requirements of § 6050P and that the failure was not due to willful neglect. Form1040ez . Form1040ez 04 Because of the effective date in section 8. Form1040ez 02 of this revenue procedure, the Service will not assert penalties under § 6721 or § 6722 on the grounds of a failure to timely file and furnish a 2010 or 2011 Form 1099-MISC, as described in section 5. Form1040ez 06 of this revenue procedure. Form1040ez SECTION 9. Form1040ez DRAFTING INFORMATION The principal authors of this revenue procedure are Ronald J. Form1040ez Goldstein of the Office of Chief Counsel (Procedure and Administration); Shareen S. Form1040ez Pflanz and Sheldon A. Form1040ez Iskow of the Office of Chief Counsel (Income Tax and Accounting); and Andrea M. Form1040ez Hoffenson of the Office of Chief Counsel (Financial Institutions and Products). Form1040ez For further information regarding this revenue procedure, contact Procedure and Administration branch 1 at (202) 622-4910, Income Tax and Accounting branch 4 at (202) 622-4920, or Financial Institutions and Products branch 1 at (202) 622-3920 (not toll-free calls). Form1040ez Prev  Up  Next   Home   More Internal Revenue Bulletins