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Online Tax Filing

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Online Tax Filing

Online tax filing 1. Online tax filing   Canceled Debts Table of Contents General RulesForm 1099-C Discounts and loan modifications Sales or other dispositions (such as foreclosures and repossessions) Abandonments Stockholder debt This chapter discusses the tax treatment of canceled debts. Online tax filing General Rules Generally, if a debt for which you are personally liable is forgiven or discharged for less than the full amount owed, the debt is considered canceled in whatever amount it remained unpaid. Online tax filing There are exceptions to this rule, discussed under Exceptions , later. Online tax filing Generally, you must include the canceled debt in your income. Online tax filing However, you may be able to exclude the canceled debt. Online tax filing See Exclusions , later. Online tax filing Example. Online tax filing John owed $1,000 to Mary. Online tax filing Mary agreed to accept and John paid $400 in satisfaction of the entire debt. Online tax filing John has canceled debt of $600. Online tax filing Example. Online tax filing Margaret owed $1,000 to Henry. Online tax filing Henry and Margaret agreed that Margaret would provide Henry with services (instead of money) in full satisfaction of the debt. Online tax filing Margaret does not have canceled debt. Online tax filing Instead, she has income from services. Online tax filing A debt includes any indebtedness: For which you are liable, or Subject to which you hold property. Online tax filing Debt for which you are personally liable is recourse debt. Online tax filing All other debt is nonrecourse debt. Online tax filing If you are not personally liable for the debt, you do not have ordinary income from the cancellation of debt unless you retain the collateral and either: The lender offers a discount for the early payment of the debt, or The lender agrees to a loan modification that results in the reduction of the principal balance of the debt. Online tax filing See Discounts and loan modifications , later. Online tax filing However, upon the disposition of the property securing a nonrecourse debt, the amount realized includes the entire unpaid amount of the debt, not just the FMV of the property. Online tax filing As a result, you may realize a gain or loss if the outstanding debt immediately before the disposition is more or less than your adjusted basis in the property. Online tax filing For more details on figuring your gain or loss, see chapter 2 of this publication or see Publication 544. Online tax filing There are several exceptions and exclusions that may result in part or all of a canceled debt being nontaxable. Online tax filing See Exceptions and Exclusions, later. Online tax filing You must report any taxable canceled debt as ordinary income on: Form 1040 or Form 1040NR, line 21, if the debt is a nonbusiness debt; Schedule C (Form 1040), line 6 (or Schedule C-EZ (Form 1040), line 1), if the debt is related to a nonfarm sole proprietorship; Schedule E (Form 1040), line 3, if the debt is related to nonfarm rental of real property; Form 4835, line 6, if the debt is related to a farm rental activity for which you use Form 4835 to report farm rental income based on crops or livestock produced by a tenant; or Schedule F (Form 1040), line 8, if the debt is farm debt and you are a farmer. Online tax filing Form 1099-C If you receive a Form 1099-C, that means an applicable entity has reported an identifiable event to the IRS regarding a debt you owe. Online tax filing The identifiable event may be an actual cancellation of the debt or it may be an event the applicable entity is required, solely for purposes of reporting to the IRS, to treat as a cancellation of debt. Online tax filing For information on the reasons an applicable entity files Form 1099-C, see Identifiable event codes, later. Online tax filing Unless you meet one of the exceptions or exclusions discussed later, this canceled debt is ordinary income and must be reported on the appropriate form discussed above. Online tax filing An applicable entity includes: A federal government agency, A financial institution, A credit union, and Any organization a significant trade or business of which is lending money. Online tax filing Identifiable event codes. Online tax filing    Box 6 of Form 1099-C should indicate the reason the creditor filed this form. Online tax filing The codes shown in box 6 are explained below. Online tax filing Also see the chart after the explanation for a quick reference guide for the codes used in Box 6. Online tax filing Note. Online tax filing Codes A through G and I identify specific occurrences resulting from an actual discharge of indebtedness. Online tax filing However, Code H, Expiration of nonpayment testing period, does not necessarily identify an actual discharge of indebtedness. Online tax filing Code A — Bankruptcy. Online tax filing Code A is used to identify cancellation of debt as a result of a title 11 bankruptcy case. Online tax filing See Bankruptcy , later. Online tax filing Code B — Other judicial debt relief. Online tax filing Code B is used to identify cancellation of debt as a result of a receivership, foreclosure, or similar federal or state court proceeding other than bankruptcy. Online tax filing Code C — Statute of limitations or expiration of deficiency period. Online tax filing Code C is used to identify cancellation of debt either when the statute of limitations for collecting the debt expires or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. Online tax filing In the case of the expiration of a statute of limitations, an identifiable event occurs only if and when your affirmative defense of the statute of limitations is upheld in a final judgment or decision in a judicial proceeding, and the period for appealing the judgment or decision has expired. Online tax filing Code D — Foreclosure election. Online tax filing Code D is used to identify cancellation of debt when the creditor elects foreclosure remedies that statutorily end or bar the creditor's right to pursue collection of the debt. Online tax filing This event applies to a mortgage lender or holder who is barred from pursuing debt collection after a power of sale in the mortgage or deed of trust is exercised. Online tax filing Code E — Debt relief from probate or similar proceeding. Online tax filing Code E is used to identify cancellation of debt as a result of a probate court or similar legal proceeding. Online tax filing Code F — By agreement. Online tax filing Code F is used to identify cancellation of debt as a result of an agreement between the creditor and the debtor to cancel the debt at less than full consideration. Online tax filing Code G — Decision or policy to discontinue collection. Online tax filing Code G is used to identify cancellation of debt as a result of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. Online tax filing For purposes of this identifiable event, a defined policy includes both a written policy and the creditor's established business practice. Online tax filing Code H — Expiration of nonpayment testing period. Online tax filing Code H is used to indicate that the creditor has not received a payment on the debt during a testing period ending on December 31, 2013. Online tax filing The testing period is a 36-month period increased by the number of months the creditor was prevented from engaging in collection activity by a stay in bankruptcy or similar bar under state or local law. Online tax filing This identifiable event applies only for a creditor that is a financial institution or credit union (and certain of their subsidiaries), the Federal Deposit Insurance Corporation (FDIC), Resolution Trust Corporation (RTC), National Credit Union Administration (NCUA), and other Federal executive agencies. Online tax filing Expiration of the nonpayment testing period does not necessarily result from an actual discharge of indebtedness. Online tax filing Code I — Other actual discharge before identifiable event. Online tax filing Code I is used to identify an actual cancellation of debt that occurs before any of the identifiable events described in codes A through H. Online tax filing Form 1099-C Reference Guide for Box 6 Identifiable Event Codes A Bankruptcy B Other judicial debt relief C Statute of limitations or expiration of deficiency period D Foreclosure election E Debt relief from probate or similar proceeding F By agreement G Decision or policy to discontinue collection H Expiration of nonpayment testing period I Other actual discharge before identifiable event Even if you did not receive a Form 1099-C, you must report canceled debt as gross income on your tax return unless one of the exceptions or exclusions described later applies. Online tax filing Amount of canceled debt. Online tax filing    The amount in box 2 of Form 1099-C may represent some or all of the debt that has been canceled or treated as canceled. Online tax filing The amount in box 2 will include principal and may include interest and other nonprincipal amounts (such as fees or penalties). Online tax filing Unless you meet one of the exceptions or exclusions discussed later, the amount of the debt that has been canceled is ordinary income and must be reported on the appropriate form as discussed earlier. Online tax filing Interest included in canceled debt. Online tax filing    If any interest is included in the amount of canceled debt in box 2, it will be shown in box 3. Online tax filing Whether the interest portion of the canceled debt must be included in your income depends on whether the interest would be deductible if you paid it. Online tax filing See Deductible Debt under Exceptions, later. Online tax filing Persons who each receive a Form 1099-C showing the full amount of debt. Online tax filing    If you and another person were jointly and severally liable for a canceled debt, each of you may get a Form 1099-C showing the entire amount of the canceled debt. Online tax filing However, you may not have to report that entire amount as income. Online tax filing The amount, if any, you must report depends on all the facts and circumstances, including: State law, The amount of debt proceeds each person received, How much of any interest deduction from the debt was claimed by each person, How much of the basis of any co-owned property bought with the debt proceeds was allocated to each co-owner, and Whether the canceled debt qualifies for any of the exceptions or exclusions described in this publication. Online tax filing See Example 3 under Insolvency, later. Online tax filing Discounts and loan modifications If a lender discounts (reduces) the principal balance of a loan because you pay it off early, or agrees to a loan modification (a “workout”) that includes a reduction in the principal balance of a loan, the amount of the discount or the amount of principal reduction is canceled debt. Online tax filing However, if the debt is nonrecourse and you did not retain the collateral, you do not have cancellation of the debt income. Online tax filing The amount of the canceled debt must be included in income unless one of the exceptions or exclusions described later applies. Online tax filing For more details, see Exceptions and Exclusions, later. Online tax filing Sales or other dispositions (such as foreclosures and repossessions) Recourse debt. Online tax filing   If you owned property that was subject to a recourse debt in excess of the FMV of the property, the lender's foreclosure or repossession of the property is treated as a sale or disposition of the property by you and may result in your realization of gain or loss. Online tax filing The gain or loss on the disposition of the property is measured by the difference between the FMV of the property at the time of the disposition and your adjusted basis (usually your cost) in the property. Online tax filing The character of the gain or loss (such as ordinary or capital) is determined by the character of the property. Online tax filing If the lender forgives all or part of the amount of the debt in excess of the FMV of the property, the cancellation of the excess debt may result in ordinary income. Online tax filing The ordinary income from the cancellation of debt (the excess of the canceled debt over the FMV of the property) must be included in your gross income reported on your tax return unless one of the exceptions or exclusions described later applies. Online tax filing For more details, see Exceptions and Exclusions, later. Online tax filing Nonrecourse debt. Online tax filing   If you owned property that was subject to a nonrecourse debt in excess of the FMV of the property, the lender's foreclosure on the property does not result in ordinary income from the cancellation of debt. Online tax filing The entire amount of the nonrecourse debt is treated as an amount realized on the disposition of the property. Online tax filing The gain or loss on the disposition of the property is measured by the difference between the total amount realized (the entire amount of the nonrecourse debt plus the amount of cash and the FMV of any property received) and your adjusted basis in the property. Online tax filing The character of the gain or loss is determined by the character of the property. Online tax filing More information. Online tax filing    See Publications 523, 544, and 551, and chapter 2 of this publication for more details. Online tax filing Abandonments Recourse debt. Online tax filing   If you abandon property that secures a debt for which you are personally liable (recourse debt) and the debt is canceled, you will realize ordinary income equal to the canceled debt. Online tax filing You must report this income on your tax return unless one of the exceptions or exclusions described later applies. Online tax filing For more details, see Exceptions and Exclusions, later. Online tax filing This income is separate from any amount realized from the abandonment of the property. Online tax filing For more details, see chapter 3. Online tax filing Nonrecourse debt. Online tax filing   If you abandon property that secures a debt for which you are not personally liable (nonrecourse debt), you may realize gain or loss but will not have cancellation of indebtedness income. Online tax filing Stockholder debt If you are a stockholder in a corporation and the corporation cancels or forgives your debt to it, the canceled debt is a constructive distribution. Online tax filing For more information, see Publication 542, Corporations. Online tax filing Prev  Up  Next   Home   More Online Publications
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The Online Tax Filing

Online tax filing Index A Actual knowledge Innocent spouse relief, Actual Knowledge or Reason To Know Separation of liability relief, Actual Knowledge Assistance (see Tax help) B Burden of proof, separation of liability, Burden of proof. Online tax filing C Comments on publication, Comments and suggestions. Online tax filing Community property law, relief from liability arising from, Community Property Laws Community property laws, Community Property Laws D Decedent, Form 8857 filed by or on behalf of a decedent. Online tax filing Domestic violence (separation of liability), Exception for spousal abuse or domestic violence. Online tax filing E Equitable relief Conditions for getting, Conditions for Getting Equitable Relief Factors for determining whether to grant, Factors for Determining Whether To Grant Equitable Relief Refunds, Refunds Under Equitable Relief Erroneous items, Erroneous Items Executors (see Decedent) F Flowcharts, Flowcharts Form 8857 Filled-in example, Filled-in Form 8857 For decedent, Form 8857 filed by or on behalf of a decedent. Online tax filing Tax Court review, Tax Court Review of Request When to file, When to file Form 8857. Online tax filing Free tax services, How To Get Tax Help H Help (see Tax help) How to request relief, How To Request Relief I Indications of unfairness Innocent spouse relief, Indications of Unfairness for Innocent Spouse Relief Injured spouse relief, Publication 971 - Additional Material Innocent spouse relief, Innocent Spouse Relief J Joint and several liability, Publication 971 - Additional Material L Limitations on Relief, Limitations on Relief M More information (see Tax help) N No joint return filed, Relief for Married Persons Who Did Not File Joint Returns P Partial relief, innocent spouse relief, Partial relief when a portion of erroneous item is unknown. Online tax filing Publications (see Tax help) Q Questions & Answers, Publication 971 - Additional Material R Reason to know, Actual Knowledge or Reason To Know Refunds, Refunds Limit on amount of refund, Limit on Amount of Refund Proof required, Proof Required Under equitable relief, Refunds Under Equitable Relief S Separation of liability relief, Separation of Liability Relief Spousal abuse, The IRS Must Contact Your Spouse or Former Spouse, Exception for spousal abuse or domestic violence. Online tax filing Spousal notification, The IRS Must Contact Your Spouse or Former Spouse, Publication 971 - Additional Material Suggestions for publication, Comments and suggestions. Online tax filing T Tax Court review, Tax Court Review of Request Tax help, How To Get Tax Help Taxpayer Advocate, Taxpayer Advocate Service. Online tax filing TEFRA partnership proceedings, Exception for agreements relating to TEFRA partnership proceedings. Online tax filing Transferee liability, Transferee liability not affected by innocent spouse relief provisions. Online tax filing Transfers of property to avoid tax, Transfers of Property To Avoid Tax TTY/TDD information, How To Get Tax Help U Underpaid tax, Equitable Relief Understated tax, Understated Tax United States Tax Court, Tax Court Review of Request W When to file Form 8857, When to file Form 8857. Online tax filing Prev  Up     Home   More Online Publications