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Free State File

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Free State File

Free state file Publication 225 - Introductory Material Table of Contents IntroductionOrdering forms and publications. Free state file Tax questions. Free state file Future Developments What's New for 2013 What's New for 2014 Reminders Introduction You are in the business of farming if you cultivate, operate, or manage a farm for profit, either as owner or tenant. Free state file A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. Free state file It also includes plantations, ranches, ranges, and orchards. Free state file This publication explains how the federal tax laws apply to farming. Free state file Use this publication as a guide to figure your taxes and complete your farm tax return. Free state file If you need more information on a subject, get the specific IRS tax publication covering that subject. Free state file We refer to many of these free publications throughout this publication. Free state file See chapter 16 for information on ordering these publications. Free state file The explanations and examples in this publication reflect the Internal Revenue Service's interpretation of tax laws enacted by Congress, Treasury regulations, and court decisions. Free state file However, the information given does not cover every situation and is not intended to replace the law or change its meaning. Free state file This publication covers subjects on which a court may have made a decision more favorable to taxpayers than the interpretation of the Service. Free state file Until these differing interpretations are resolved by higher court decisions, or in some other way, this publication will continue to present the interpretation of the Service. Free state file The IRS Mission. Free state file   Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. Free state file Comments and suggestions. Free state file   We welcome your comments about this publication and your suggestions for future editions. Free state file   You can write to us at the following address: Internal Revenue Service Business Forms and Publications Branch SE:W:CAR:MP:T:B 1111 Constitution Ave. Free state file NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Free state file Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Free state file   You can email us at taxforms@irs. Free state file gov. Free state file Please put “Publications Comment” on the subject line. Free state file You can also send us comments from www. Free state file irs. Free state file gov/formspubs/, select “Comment on Tax Forms and Publications” under “More Information. Free state file ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Free state file Ordering forms and publications. Free state file   Visit www. Free state file irs. Free state file gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Free state file Internal Revenue Service 1201 N. Free state file Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Free state file   If you have a tax question, check the information available on IRS. Free state file gov or call 1-800-829-1040. Free state file We cannot answer tax questions sent to either of the above addresses. Free state file Comments on IRS enforcement actions. Free state file   The Small Business and Agricultural Regulatory Enforcement Ombudsman and 10 Regional Fairness Boards were established to receive comments from small business about federal agency enforcement actions. Free state file The Ombudsman will annually evaluate the enforcement activities of each agency and rate its responsiveness to small business. Free state file If you wish to comment on the enforcement actions of the IRS, you can: Call 1-888-734-3247, Fax your comments to 202-481-5719, Write to Office of the National Ombudsman U. Free state file S. Free state file Small Business Administration 409 3rd Street, S. Free state file W. Free state file  Washington, DC 20416 Send an email to ombudsman@sba. Free state file gov, or Download the appraisal form at  www. Free state file sba. Free state file gov/ombudsman. Free state file Treasury Inspector General for Tax Administration. Free state file   If you want to confidentially report misconduct, waste, fraud, or abuse by an IRS employee, you can call 1-800-366-4484 (1-800-877-8339 for TTY/TDD users). Free state file You can remain anonymous. Free state file Farm tax classes. Free state file   Many state Cooperative Extension Services conduct farm tax workshops in conjunction with the IRS. Free state file Contact your county extension office for more information. Free state file Rural tax education website. Free state file   The Rural Tax Education website is a source for information concerning agriculturally related income and deductions and self-employment tax. Free state file The website is available for farmers and ranchers, other agricultural producers, Extension educators, and any one interested in learning about the tax side of the agricultural community. Free state file Members of the National Farm Income Tax Extension Committee are contributors for the website and the website is hosted by Utah State University Cooperative Extension. Free state file You can visit the website at www. Free state file ruraltax. Free state file org. Free state file Future Developments The IRS has created a page on IRS. Free state file gov for information about Publication 225, at  www. Free state file irs. Free state file gov/pub225. Free state file Information about recent developments affecting Publication 225 will be posted on that page. Free state file What's New for 2013 The following items highlight a number of administrative and tax law changes for 2013. Free state file They are discussed in more detail throughout the publication. Free state file Standard mileage rate. Free state file  For 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56. Free state file 5 cents. Free state file See chapter 4. Free state file Simplified method for business use of home deduction. Free state file  The IRS now provides a simplified method to determine your expenses for business use of your home. Free state file For more information, see Schedule C (Form 1040), Part II, and its instructions. Free state file See chapter 4. Free state file Increased section 179 expense deduction dollar limits. Free state file  The maximum amount you can elect to deduct for most section 179 property you placed in service in 2013 is $500,000. Free state file This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. Free state file See chapter 7. Free state file Extension of special depreciation allowance for certain qualified property acquired after December 31, 2007. Free state file  You may be able to take a 50% special depreciation allowance for certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Free state file See chapter 7. Free state file Expiration of the 3-year recovery period for certain race horses. Free state file . Free state file  The 3-year recovery period for race horses two years old or younger will expire for such horses placed in service after December 31, 2013. Free state file See chapter 7. Free state file Tax rates. Free state file  For tax years beginning in 2013, the social security part of the self-employment tax increases from 10. Free state file 4% to 12. Free state file 4%. Free state file As a result, the self-employment tax is increased from 13. Free state file 3% to 15. Free state file 3%. Free state file See chapter 12. Free state file Maximum net earnings. Free state file  The maximum net self-employment earnings subject to the social security part (12. Free state file 4%) of the self-employment tax increased to $113,700 for 2013. Free state file There is no maximum limit on earnings subject to the Medicare part (2. Free state file 9%). Free state file See chapter 12. Free state file Net investment income tax. Free state file  For tax years beginning in 2013, individuals, estates, and trusts may be subject to the net investment income tax (NIIT). Free state file If you are a trader in financial instruments and commodities and required to file Schedule C (Form 1040), your investment income (for purposes of the NIIT) may be reduced by your interest and other investment expenses to the extent those expenses are not used to reduce your self-employment income. Free state file For information about NIIT and the special rule for traders in financial instruments and commodities, see the Instructions for Form 8960. Free state file Social Security and Medicare Tax for 2013. Free state file  The employee tax rate for social security is 6. Free state file 2%. Free state file The employer tax rate for social security remains unchanged at 6. Free state file 2%. Free state file The social security wage base limit is $113,700. Free state file The Medicare tax rate is 1. Free state file 45% each for the employee and employer, unchanged from 2012. Free state file There is no wage base limit for Medicare tax. Free state file See chapter 13. Free state file Additional Medicare Tax. Free state file  For tax years beginning in 2013, a 0. Free state file 9% Additional Medicare Tax applies to your Medicare wages, Railroad Tax Act (RRTA) compensation, and self-employment income above a threshold amount. Free state file Use Form 8959, Additional Medicare Tax, to figure this tax. Free state file For more information, see the Instructions for Form 8959 and the Instructions for Schedule SE (Form 1040). Free state file In addition to withholding Medicare tax at 1. Free state file 45%, you must withhold a 0. Free state file 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Free state file You are required to begin withholding Additional Medicare Tax in the pay period in which you pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. Free state file Additional Medicare Tax is only imposed on the employee. Free state file There is no employer share of Additional Medicare Tax. Free state file All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold. Free state file For more information on what wages are subject to Medicare tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15 (Circular E), Employer's Tax Guide. Free state file For more information on Additional Medicare Tax, visit IRS. Free state file gov and enter “Additional Medicare Tax” in the search box. Free state file See chapter 13. Free state file Leave-Based donation programs to aid victims of Hurricane Sandy. Free state file  Under these programs, employees may donate their vacation, sick, or personal leave in exchange for employer cash payments made before January 1, 2014, to qualified tax-exempt organizations providing relief for the victims of Hurricane Sandy. Free state file The donated leave will not be included in the income or wages of the employee. Free state file The employer may deduct the cash payments as business expenses or charitable contributions. Free state file See chapter 13. Free state file Work opportunity tax credit for qualified tax-exempt organizations hiring qualified veterans extended. Free state file  The work opportunity tax credit is now available for eligible unemployed veterans who begin work before January 1, 2014. Free state file Qualified tax-exempt organizations that hire eligible unemployed veterans can claim the work opportunity tax credit against their payroll tax liability using Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. Free state file For more information, visit IRS. Free state file gov and enter “work opportunity credit” in the search box. Free state file See chapter 13. Free state file Estimated tax. Free state file  For tax years beginning in 2013, the Net Investment Income Tax (NIIT) may need to be included when calculating your estimated tax. Free state file Also, when figuring your estimated tax, you may need to include the 0. Free state file 9% Additional Medicare Tax applicable to Medicare wages, Railroad Retirement Tax Act (RRTA) compensation, and self-employment income above the threshold amount based on your filing status. Free state file For more information, see Publication 505. Free state file What's New for 2014 Maximum net earnings. Free state file  The maximum net self-employment earnings subject to the social security part of the self-employment tax for 2014 will be discussed in the 2013 Publication 334. Free state file See chapter 12. Free state file Social security and Medicare tax for 2014. Free state file  The employee and employer tax rates for social security and the maximum amount of wages subject to social security tax for 2014 will be discussed in Publication 51 (Circular A), Agricultural Employer's Tax Guide (For use in 2014). Free state file The Medicare tax rate for 2014 will also be discussed in Publication 51 (Circular A) (For use in 2014). Free state file There is no limit on the amount of wages subject to Medicare tax. Free state file See chapter 13. Free state file Reminders The following reminders and other items may help you file your tax return. Free state file   IRS e-file (Electronic Filing) You can file your tax returns electronically using an IRS e-file option. Free state file The benefits of IRS e-file include faster refunds, increased accuracy, and acknowledgment of IRS receipt of your return. Free state file You can use one of the following IRS e-file options. Free state file Use an authorized IRS e-file provider. Free state file Use a personal computer. Free state file Visit a Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) site. Free state file For details on these fast filing methods, see your income tax package. Free state file Principal agricultural activity codes. Free state file  You must enter on line B of Schedule F (Form 1040) a code that identifies your principal agricultural activity. Free state file It is important to use the correct code because this information will identify market segments of the public for IRS Taxpayer Education programs. Free state file The U. Free state file S. Free state file Census Bureau also uses this information for its economic census. Free state file See the list of Principal Agricultural Activity Codes on page 2 of Schedule F (Form 1040). Free state file Publication on employer identification numbers (EIN). Free state file  Publication 1635, Understanding Your Employer Identification Number, provides general information on employer identification numbers. Free state file Topics include how to apply for an EIN and how to complete Form SS-4. Free state file Change of address. Free state file  If you change your home address, you should use Form 8822, Change of Addres, to notify the IRS. Free state file If you change your business address, you should use Form 8822-B, Change of Address or Responsible Party — Business, to notify the IRS. Free state file Be sure to include your suite, room, or other unit number. Free state file Reportable transactions. Free state file  You must file Form 8886, Reportable Transaction Disclosure Statement, to report certain transactions. Free state file You may have to pay a penalty if you are required to file Form 8886 but do not do so. Free state file Reportable transactions include (1) transactions the same as or substantially similar to tax avoidance transactions identified by the IRS, (2) transactions offered to you under conditions of confidentiality and for which you paid an advisor a minimum fee, (3) transactions for which you have or a related party has a right to a full or partial refund of fees if all or part of the intended tax consequences from the transaction are not sustained, (4) transactions that result in losses of at least $2 million in any single year or $4 million in any combination of years, and (5) transactions with asset holding periods of 45 days or less and that result in a tax credit of more than $250,000. Free state file For more information, see the Instructions for Form 8886. Free state file Form W-4 for 2014. Free state file  You should make new Forms W-4 available to your employees and encourage them to check their income tax withholding for 2014. Free state file Those employees who owed a large amount of tax or received a large refund for 2013 may need to submit a new Form W-4. Free state file See Publication 919, How Do I Adjust My Tax Withholding. Free state file Form 1099-MISC. Free state file  Generally, file Form 1099-MISC if you pay at least $600 in rents, services, and other miscellaneous payments in your farming business to an individual (for example, an accountant, an attorney, or a veterinarian) who is not your employee. Free state file Limited Liability Company (LLC). Free state file  For purposes of this publication, a limited liability company (LLC) is a business entity organized in the United States under state law. Free state file Unlike a partnership, all of the members of an LLC have limited personal liability for its debts. Free state file An LLC may be classified for federal income tax purposes as a partnership, corporation, or an entity disregarded as separate from its owner by applying the rules in Regulations section 301. Free state file 7701-3. Free state file See Publication 3402 for more details. Free state file Photographs of missing children. Free state file  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Free state file Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Free state file You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Free state file Prev  Up  Next   Home   More Online Publications
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The Free State File

Free state file 4. Free state file   Detailed Examples Table of Contents These examples use actual forms to help you prepare your income tax return. Free state file However, the information shown on the filled-in forms is not from any actual person or scenario. Free state file Example 1—Mortgage loan modification. Free state file    In 2007, Nancy Oak bought a main home for $435,000. Free state file Nancy took out a $420,000 mortgage loan to buy the home and made a down payment of $15,000. Free state file The loan was secured by the home. Free state file The mortgage loan was a recourse debt, meaning that Nancy was personally liable for the debt. Free state file In 2008, Nancy took out a second mortgage loan (also a recourse debt) in the amount of $30,000 that was used to substantially improve her kitchen. Free state file    In 2011, when the outstanding principal of the first and second mortgage loans was $440,000, Nancy refinanced the two recourse loans into one recourse loan in the amount of $475,000. Free state file The FMV of Nancy's home at the time of the refinancing was $500,000. Free state file Nancy used the additional $35,000 debt ($475,000 new mortgage loan minus $440,000 outstanding principal of Nancy's first and second mortgage loans immediately before the refinancing) to pay off personal credit cards and to pay college tuition for her son. Free state file After the refinancing, Nancy has qualified principal residence indebtedness in the amount of $440,000 because the refinanced debt is qualified principal residence indebtedness only to the extent the amount of debt is not more than the old mortgage principal just before the refinancing. Free state file   In 2013, Nancy was unable to make her mortgage loan payments. Free state file On August 31, 2013, when the outstanding balance of her refinanced mortgage loan was still $475,000 and the FMV of the property was $425,000, Nancy's bank agreed to a loan modification (a “workout”) that resulted in a $40,000 reduction in the principal balance of her loan. Free state file Nancy was neither insolvent nor in bankruptcy at the time of the loan modification. Free state file   Nancy received a 2013 Form 1099-C from her bank in January 2014 showing canceled debt of $40,000 in box 2. Free state file Identifiable event code "F" appears in box 6. Free state file This box shows the reason the creditor has filed Form 1099-C. Free state file To determine if she must include the canceled debt in her income, Nancy must determine whether she meets any of the exceptions or exclusions that apply to canceled debts. Free state file Nancy determines that the only exception or exclusion that applies to her is the qualified principal residence indebtedness exclusion. Free state file   Next, Nancy determines the amount, if any, of the $40,000 of canceled debt that was qualified principal residence indebtedness. Free state file Although Nancy has $440,000 of qualified principal residence indebtedness, part of her loan ($35,000) was not qualified principal residence indebtedness because it was used to pay off personal credit cards and college tuition for her son. Free state file Applying the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent the amount canceled is more than the amount of the debt (immediately before the cancellation) that is not qualified principal residence indebtedness. Free state file Thus, Nancy can exclude only $5,000 of the canceled debt as qualified principal residence indebtedness ($40,000 amount canceled minus $35,000 nonqualified debt). Free state file   Because Nancy does not meet any other exception or exclusion, she checks only the box on line 1e of Form 982 and enters $5,000 on line 2. Free state file Nancy must also enter $5,000 on line 10b and reduce the basis of her main home by the $5,000 she excluded from income, bringing the adjusted basis in her home to $460,000 ($435,000 purchase price plus $30,000 substantial improvement minus $5,000). Free state file Nancy must also include the $35,000 nonqualified debt portion in income on Form 1040, line 21. Free state file You can see Nancy's Form 1099-C and a portion of her Form 1040 below. Free state file Nancy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Free state file Please click the link to view the image. Free state file Form 1099-C, Cancellation of Debt Nancy's 2013 Form 1040 This image is too large to be displayed in the current screen. Free state file Please click the link to view the image. Free state file Form 1040, U. Free state file S. Free state file Individual Income Tax Nancy's Form 982 This image is too large to be displayed in the current screen. Free state file Please click the link to view the image. Free state file Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)              Example 2—Mortgage loan foreclosure. Free state file    In 2005, John and Mary Elm bought a main home for $335,000. Free state file John and Mary took out a $320,000 mortgage loan to buy the home and made a down payment of $15,000. Free state file The loan was secured by the home and is a recourse debt, meaning John and Mary are personally liable for the debt. Free state file   John and Mary became unable to make their mortgage loan payments and on March 1, 2013, when the outstanding balance of the mortgage loan was $315,000 and the FMV of the property was $290,000, the bank foreclosed on the property and simultaneously canceled the remaining mortgage debt. Free state file Immediately before the foreclosure, John and Mary's only other assets and liabilities were a checking account with a balance of $6,000, retirement savings of $13,000, and credit card debt of $5,500. Free state file   John and Mary received a 2013 Form 1099-C showing canceled debt of $25,000 in box 2 ($315,000 outstanding balance minus $290,000 FMV) and an FMV of $290,000 in box 7. Free state file Identifiable event code "D" appears in box 6. Free state file This box shows the reason the creditor has filed Form 1099-C. Free state file In order to determine if John and Mary must include the canceled debt in income, they must first determine whether they meet any of the exceptions or exclusions that apply to canceled debts. Free state file In this example, John and Mary meet both the insolvency and qualified principal residence indebtedness exclusions. Free state file Their sample Form 1099-C is shown on this page. Free state file   John and Mary complete the insolvency worksheet and determine that they were insolvent immediately before the cancellation because at that time their liabilities exceeded the FMV of their assets by $11,500 ($320,500 total liabilities minus $309,000 FMV of total assets). Free state file However, because the entire debt canceled is qualified principal residence indebtedness, the insolvency exclusion only applies if John and Mary elect to apply the insolvency exclusion instead of the qualified principal residence exclusion. Free state file   John and Mary do not elect to apply the insolvency exclusion instead of the qualified principal residence exclusion because under the insolvency exclusion their exclusion would be limited to the amount by which they were insolvent ($11,500). Free state file Instead, John and Mary check box 1e of Form 982 to exclude the canceled debt under the qualified principal residence exclusion. Free state file Under the qualified principal residence exclusion, the amount that John and Mary can exclude is not limited because their qualified principal residence indebtedness is not more than $2 million and no portion of the loan was nonqualified debt. Free state file As a result, John and Mary enter the full $25,000 of canceled debt on line 2 of Form 982. Free state file Because John and Mary no longer own the home due to the foreclosure, John and Mary have no remaining basis in the home at the time of the debt cancellation. Free state file Thus, John and Mary leave line 10b of Form 982 blank. Free state file   John and Mary must also determine whether they have a gain or loss from the foreclosure. Free state file John and Mary complete Table 1-1 (shown below) and find that they have a $45,000 loss from the foreclosure. Free state file Because this loss relates to their home, it is a nondeductible loss. Free state file   John and Mary's Form 1099-C, Insolvency Worksheet, and Form 982 follow. Free state file John and Mary's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Free state file Please click the link to view the image. Free state file Form 1099-C, Cancellation of Debt Table 1-1. Free state file Worksheet for Foreclosures and Repossessions (for John and Mary Elm) Part 1. Free state file Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Free state file Otherwise, go to Part 2. Free state file 1. Free state file Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $315,000. Free state file 00 2. Free state file Enter the fair market value of the transferred property $290,000. Free state file 00 3. Free state file Ordinary income from the cancellation of debt upon foreclosure or repossession. Free state file * Subtract line 2 from line 1. Free state file If less than zero, enter zero. Free state file Next, go to Part 2 $ 25,000. Free state file 00 Part 2. Free state file Gain or loss from foreclosure or repossession. Free state file   4. Free state file Enter the smaller of line 1 or line 2. Free state file If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property $290,000. Free state file 00 5. Free state file Enter any proceeds you received from the foreclosure sale   6. Free state file Add line 4 and line 5 $290,000. Free state file 00 7. Free state file Enter the adjusted basis of the transferred property $335,000. Free state file 00 8. Free state file Gain or loss from foreclosure or repossession. Free state file Subtract line 7 from line 6 ($ 45,000. Free state file 00) * The income may not be taxable. Free state file See chapter 1 for more details. Free state file Insolvency Worksheet—John and Mary Elm Date debt was canceled (mm/dd/yy) 03/01/13 Part I. Free state file Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. Free state file Credit card debt $ 5,500 2. Free state file Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 315,000 3. Free state file Car and other vehicle loans $ 4. Free state file Medical bills owed $ 5. Free state file Student loans $ 6. Free state file Accrued or past-due mortgage interest $ 7. Free state file Accrued or past-due real estate taxes $ 8. Free state file Accrued or past-due utilities (water, gas, electric) $ 9. Free state file Accrued or past-due child care costs $ 10. Free state file Federal or state income taxes remaining due (for prior tax years) $ 11. Free state file Judgments $ 12. Free state file Business debts (including those owed as a sole proprietor or partner) $ 13. Free state file Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. Free state file Other liabilities (debts) not included above $ 15. Free state file Total liabilities immediately before the cancellation. Free state file Add lines 1 through 14. Free state file $ 320,500 Part II. Free state file Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. Free state file Cash and bank account balances $ 6,000 17. Free state file Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 290,000 18. Free state file Cars and other vehicles $ 19. Free state file Computers $ 20. Free state file Household goods and furnishings (for example, appliances, electronics, furniture, etc. Free state file ) $ 21. Free state file Tools $ 22. Free state file Jewelry $ 23. Free state file Clothing $ 24. Free state file Books $ 25. Free state file Stocks and bonds $ 26. Free state file Investments in coins, stamps, paintings, or other collectibles $ 27. Free state file Firearms, sports, photographic, and other hobby equipment $ 28. Free state file Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 13,000 29. Free state file Interest in a pension plan $ 30. Free state file Interest in education accounts $ 31. Free state file Cash value of life insurance $ 32. Free state file Security deposits with landlords, utilities, and others $ 33. Free state file Interests in partnerships $ 34. Free state file Value of investment in a business $ 35. Free state file Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. Free state file Other assets not included above $ 37. Free state file FMV of total assets immediately before the cancellation. Free state file Add lines 16 through 36. Free state file $ 309,000 Part III. Free state file Insolvency 38. Free state file Amount of Insolvency. Free state file Subtract line 37 from line 15. Free state file If zero or less, you are not insolvent. Free state file $ 11,500 John and Mary's Form 982 This image is too large to be displayed in the current screen. Free state file Please click the link to view the image. Free state file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)          Example 3—Mortgage loan foreclosure with debt exceeding $2 million limit. Free state file    In 2011, Kathy and Frank Willow got married and entered into a contract with Hive Construction Corporation to build a house for $3,000,000 to be used as their main home. Free state file Kathy and Frank made a $400,000 down payment and took out a $2,600,000 mortgage to finance the remaining cost of the house. Free state file Kathy and Frank are personally liable for the mortgage loan, which is secured by the home. Free state file   In November 2013, when the outstanding principal balance on the mortgage loan was $2,500,000, the FMV of the property fell to $1,750,000 and Kathy and Frank abandoned the property by permanently moving out. Free state file The lender foreclosed on the property and, on December 5, 2013, sold the property to another buyer for $1,750,000. Free state file On December 26, 2013, the lender canceled the remaining debt. Free state file Kathy and Frank have no tax attributes other than basis of personal-use property. Free state file   The lender issued a 2013 Form 1099-C to Kathy and Frank showing canceled debt of $750,000 in box 2 (the remaining balance on the $2,500,000 mortgage debt after application of the foreclosure sale proceeds) and $1,750,000 in box 7 (FMV of the property). Free state file Identifiable event code "D" appears in box 6. Free state file This box shows the reason the creditor has filed Form 1099-C. Free state file Although Kathy and Frank abandoned the property, the lender did not need to also file a Form 1099-A because the lender canceled the debt in connection with the foreclosure in the same calendar year. Free state file Kathy and Frank are filing a joint return for 2013. Free state file   Because the foreclosure occurred prior to the debt cancellation, Kathy and Frank first calculate their gain or loss from the foreclosure using Table 1-1. Free state file Because Kathy and Frank remained personally liable for the $750,000 debt remaining after the foreclosure ($2,500,000 outstanding debt immediately before the foreclosure minus $1,750,000 satisfied through the sale of the home), Kathy and Frank enter $1,750,000 on line 1 of Table 1-1 ($2,500,000 outstanding debt immediately before the foreclosure minus the $750,000 for which they remained liable). Free state file Completing Table 1-1, Kathy and Frank find that they have no ordinary income from the cancellation of debt upon foreclosure and that they have a $1,250,000 loss. Free state file Because this loss relates to their home, it is a nondeductible loss. Free state file   Because the lender later canceled the remaining amount of the debt, Kathy and Frank must also determine whether that canceled debt is taxable. Free state file Immediately before the cancellation, Kathy and Frank had $15,000 in a savings account, household furnishings with an FMV of $17,000, a car with an FMV of $10,000, and $18,000 in credit card debt. Free state file Kathy and Frank also had the $750,000 remaining balance on the mortgage loan at that time. Free state file The household furnishings originally cost $30,000. Free state file The car had been fully paid off (so there was no related outstanding debt) and was originally purchased for $16,000. Free state file Kathy and Frank had no adjustments to the cost basis of the car. Free state file Kathy and Frank had no other assets or liabilities at the time of the cancellation. Free state file Kathy and Frank complete the insolvency worksheet to calculate that they were insolvent to the extent of $726,000 immediately before the cancellation ($768,000 of total liabilities minus $42,000 FMV of total assets). Free state file   At the beginning of 2014, Kathy and Frank had $9,000 in their savings account and $15,000 in credit card debt. Free state file Kathy and Frank also owned the same car at that time (still with an FMV of $10,000 and basis of $16,000) and the same household furnishings (still with an FMV of $17,000 and a basis of $30,000). Free state file Kathy and Frank had no other assets or liabilities at that time. Free state file Kathy and Frank no longer own the home because the lender foreclosed on it in 2013. Free state file   Because the canceled debt is qualified principal residence indebtedness, the insolvency exclusion does not apply unless Kathy and Frank elect to apply the insolvency exclusion instead of the qualified principal residence indebtedness exclusion. Free state file The maximum amount that Kathy and Frank can treat as qualified principal residence indebtedness is $2,000,000. Free state file The remaining $500,000 ($2,500,000 outstanding mortgage loan minus $2,000,000 limit on qualified principal residence indebtedness) is not qualified principal residence indebtedness. Free state file Because only a part of the loan is qualified principal residence indebtedness, Kathy and Frank must apply the ordering rule to the canceled debt. Free state file Under the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent that the amount canceled ($750,000) exceeds the amount of the loan (immediately before the cancellation) that is not qualified principal residence indebtedness ($500,000). Free state file This means that Kathy and Frank can only exclude $250,000 ($750,000 amount canceled minus $500,000 nonqualified debt) under the qualified principal residence indebtedness exclusion. Free state file   Kathy and Frank do not elect to have the insolvency exclusion apply instead of the qualified principal residence exclusion. Free state file Nonetheless, they can still apply the insolvency exclusion to the $500,000 nonqualified debt because it is not qualified principal residence indebtedness. Free state file Kathy and Frank can exclude the remaining $500,000 canceled debt under the insolvency exclusion because they were insolvent immediately before the cancellation to the extent of $726,000. Free state file Thus, Kathy and Frank check the boxes on lines 1b and 1e of Form 982 and enter $750,000 on line 2 ($250,000 excluded under the qualified principal residence indebtedness exclusion plus $500,000 excluded under the insolvency exclusion). Free state file   Next, Kathy and Frank reduce their tax attributes using Part II of Form 982. Free state file Because Kathy and Frank no longer own the home due to the foreclosure, Kathy and Frank have no remaining basis in the home at the time of the debt cancellation. Free state file Thus, Kathy and Frank leave line 10b of Form 982 blank. Free state file However, Kathy and Frank are also excluding nonqualified debt under the insolvency exclusion. Free state file As a result, Kathy and Frank must reduce the basis of property they own based on the amount of canceled debt they are excluding from income under the insolvency rules. Free state file Because Kathy and Frank have no tax attributes other than basis of personal-use property to reduce, Kathy and Frank figure the amount they must include on line 10a of Form 982 by taking the smallest of: The $46,000 bases of their personal-use property held at the beginning of 2014 ($16,000 basis in the car plus $30,000 basis in household furnishings), The $500,000 of the nonbusiness debt (other than qualified principal residence indebtedness) that they are excluding from income on line 2 of Form 982, or The $43,000 excess of the total bases of the property and the amount of money they held immediately after the cancellation over their total liabilities immediately after the cancellation ($15,000 in savings account plus $30,000 basis in household furnishings plus $16,000 adjusted basis in car minus $18,000 credit card debt). Free state file Kathy and Frank enter $43,000 on Form 982, line 10a and reduce their bases in the car and the household furnishings in proportion to the total adjusted bases in all their property. Free state file Kathy and Frank reduce the basis in the car by $14,956. Free state file 52 ($43,000 x $16,000/$46,000). Free state file And they reduce the basis in the household furnishings by $28,043. Free state file 48 ($43,000 x $30,000/$46,000). Free state file   Following are Kathy and Frank's sample forms and worksheets. Free state file Frank and Kathy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Free state file Please click the link to view the image. Free state file Form 1099-C, Cancellation of Debt Table 1-1. Free state file Worksheet for Foreclosures and Repossessions (for Frank and Kathy Willow) Part 1. Free state file Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Free state file Otherwise, go to Part 2. Free state file 1. Free state file Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $1,750,000. Free state file 00 2. Free state file Enter the fair market value of the transferred property $1,750,000. Free state file 00 3. Free state file Ordinary income from the cancellation of debt upon foreclosure or repossession. Free state file * Subtract line 2 from line 1. Free state file If less than zero, enter zero. Free state file Next, go to Part 2 $0. Free state file 00 Part 2. Free state file Gain or loss from foreclosure or repossession. Free state file   4. Free state file Enter the smaller of line 1 or line 2. Free state file If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property. Free state file $1,750,000. Free state file 00 5. Free state file Enter any proceeds you received from the foreclosure sale   6. Free state file Add line 4 and line 5 $1,750,000. Free state file 00 7. Free state file Enter the adjusted basis of the transferred property $3,000,000. Free state file 00 8. Free state file Gain or loss from foreclosure or repossession. Free state file Subtract line 7 from line 6 ($1,250,000. Free state file 00) * The income may not be taxable. Free state file See chapter 1 for more details. Free state file    Insolvency Worksheet—Frank and Kathy Willow Date debt was canceled (mm/dd/yy) 12/26/13 Part I. Free state file Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. Free state file Credit card debt $ 18,000 2. Free state file Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 750,000 3. Free state file Car and other vehicle loans $ 4. Free state file Medical bills owed $ 5. Free state file Student loans $ 6. Free state file Accrued or past-due mortgage interest $ 7. Free state file Accrued or past-due real estate taxes $ 8. Free state file Accrued or past-due utilities (water, gas, electric) $ 9. Free state file Accrued or past-due child care costs $ 10. Free state file Federal or state income taxes remaining due (for prior tax years) $ 11. Free state file Judgments $ 12. Free state file Business debts (including those owed as a sole proprietor or partner) $ 13. Free state file Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. Free state file Other liabilities (debts) not included above $ 15. Free state file Total liabilities immediately before the cancellation. Free state file Add lines 1 through 14. Free state file $ 768,000 Part II. Free state file Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. Free state file Cash and bank account balances $ 15,000 17. Free state file Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 18. Free state file Cars and other vehicles $ 10,000 19. Free state file Computers $ 20. Free state file Household goods and furnishings (for example, appliances, electronics, furniture, etc. Free state file ) $ 17,000 21. Free state file Tools $ 22. Free state file Jewelry $ 23. Free state file Clothing $ 24. Free state file Books $ 25. Free state file Stocks and bonds $ 26. Free state file Investments in coins, stamps, paintings, or other collectibles $ 27. Free state file Firearms, sports, photographic, and other hobby equipment $ 28. Free state file Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 29. Free state file Interest in a pension plan $ 30. Free state file Interest in education accounts $ 31. Free state file Cash value of life insurance $ 32. Free state file Security deposits with landlords, utilities, and others $ 33. Free state file Interests in partnerships $ 34. Free state file Value of investment in a business $ 35. Free state file Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. Free state file Other assets not included above $ 37. Free state file FMV of total assets immediately before the cancellation. Free state file Add lines 16 through 36. Free state file $ 42,000 Part III. Free state file Insolvency 38. Free state file Amount of Insolvency. Free state file Subtract line 37 from line 15. Free state file If zero or less, you are not insolvent. Free state file $ 726,000    Frank and Kathy's Form 982 This image is too large to be displayed in the current screen. Free state file Please click the link to view the image. Free state file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Prev  Up  Next   Home   More Online Publications