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Tax Planning Us 1040a

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Tax Planning Us 1040a

Tax planning us 1040a 1. Tax planning us 1040a   Definitions You Need To Know Table of Contents Other options. Tax planning us 1040a Exception. Tax planning us 1040a Certain terms used in this publication are defined below. Tax planning us 1040a The same term used in another publication may have a slightly different meaning. Tax planning us 1040a Annual additions. Tax planning us 1040a   Annual additions are the total of all your contributions in a year, employee contributions (not including rollovers), and forfeitures allocated to a participant's account. Tax planning us 1040a Annual benefits. Tax planning us 1040a   Annual benefits are the benefits to be paid yearly in the form of a straight life annuity (with no extra benefits) under a plan to which employees do not contribute and under which no rollover contributions are made. Tax planning us 1040a Business. Tax planning us 1040a   A business is an activity in which a profit motive is present and economic activity is involved. Tax planning us 1040a Service as a newspaper carrier under age 18 or as a public official is not a business. Tax planning us 1040a Common-law employee. Tax planning us 1040a   A common-law employee is any individual who, under common law, would have the status of an employee. Tax planning us 1040a A leased employee can also be a common-law employee. Tax planning us 1040a   A common-law employee is a person who performs services for an employer who has the right to control and direct the results of the work and the way in which it is done. Tax planning us 1040a For example, the employer: Provides the employee's tools, materials, and workplace, and Can fire the employee. Tax planning us 1040a   Common-law employees are not self-employed and cannot set up retirement plans for income from their work, even if that income is self-employment income for social security tax purposes. Tax planning us 1040a For example, common-law employees who are ministers, members of religious orders, full-time insurance salespeople, and U. Tax planning us 1040a S. Tax planning us 1040a citizens employed in the United States by foreign governments cannot set up retirement plans for their earnings from those employments, even though their earnings are treated as self-employment income. Tax planning us 1040a   However, an individual may be a common-law employee and a self-employed person as well. Tax planning us 1040a For example, an attorney can be a corporate common-law employee during regular working hours and also practice law in the evening as a self-employed person. Tax planning us 1040a In another example, a minister employed by a congregation for a salary is a common-law employee even though the salary is treated as self-employment income for social security tax purposes. Tax planning us 1040a However, fees reported on Schedule C (Form 1040), Profit or Loss From Business, for performing marriages, baptisms, and other personal services are self-employment earnings for qualified plan purposes. Tax planning us 1040a Compensation. Tax planning us 1040a   Compensation for plan allocations is the pay a participant received from you for personal services for a year. Tax planning us 1040a You can generally define compensation as including all the following payments. Tax planning us 1040a Wages and salaries. Tax planning us 1040a Fees for professional services. Tax planning us 1040a Other amounts received (cash or noncash) for personal services actually rendered by an employee, including, but not limited to, the following items. Tax planning us 1040a Commissions and tips. Tax planning us 1040a Fringe benefits. Tax planning us 1040a Bonuses. Tax planning us 1040a   For a self-employed individual, compensation means the earned income, discussed later, of that individual. Tax planning us 1040a   Compensation generally includes amounts deferred in the following employee benefit plans. Tax planning us 1040a These amounts are elective deferrals. Tax planning us 1040a Qualified cash or deferred arrangement (section 401(k) plan). Tax planning us 1040a Salary reduction agreement to contribute to a tax-sheltered annuity (section 403(b) plan), a SIMPLE IRA plan, or a SARSEP. Tax planning us 1040a Section 457 nonqualified deferred compensation plan. Tax planning us 1040a Section 125 cafeteria plan. Tax planning us 1040a   However, an employer can choose to exclude elective deferrals under the above plans from the definition of compensation. Tax planning us 1040a The limit on elective deferrals is discussed in chapter 2 under Salary Reduction Simplified Employee Pension (SARSEP) and in chapter 4. Tax planning us 1040a Other options. Tax planning us 1040a   In figuring the compensation of a participant, you can treat any of the following amounts as the employee's compensation. Tax planning us 1040a The employee's wages as defined for income tax withholding purposes. Tax planning us 1040a The employee's wages you report in box 1 of Form W-2, Wage and Tax Statement. Tax planning us 1040a The employee's social security wages (including elective deferrals). Tax planning us 1040a   Compensation generally cannot include either of the following items. Tax planning us 1040a Nontaxable reimbursements or other expense allowances. Tax planning us 1040a Deferred compensation (other than elective deferrals). Tax planning us 1040a SIMPLE plans. Tax planning us 1040a   A special definition of compensation applies for SIMPLE plans. Tax planning us 1040a See chapter 3. Tax planning us 1040a Contribution. Tax planning us 1040a   A contribution is an amount you pay into a plan for all those participating in the plan, including self-employed individuals. Tax planning us 1040a Limits apply to how much, under the contribution formula of the plan, can be contributed each year for a participant. Tax planning us 1040a Deduction. Tax planning us 1040a   A deduction is the plan contributions you can subtract from gross income on your federal income tax return. Tax planning us 1040a Limits apply to the amount deductible. Tax planning us 1040a Earned income. Tax planning us 1040a   Earned income is net earnings from self-employment, discussed later, from a business in which your services materially helped to produce the income. Tax planning us 1040a   You can also have earned income from property your personal efforts helped create, such as royalties from your books or inventions. Tax planning us 1040a Earned income includes net earnings from selling or otherwise disposing of the property, but it does not include capital gains. Tax planning us 1040a It includes income from licensing the use of property other than goodwill. Tax planning us 1040a   Earned income includes amounts received for services by self-employed members of recognized religious sects opposed to social security benefits who are exempt from self-employment tax. Tax planning us 1040a   If you have more than one business, but only one has a retirement plan, only the earned income from that business is considered for that plan. Tax planning us 1040a Employer. Tax planning us 1040a   An employer is generally any person for whom an individual performs or did perform any service, of whatever nature, as an employee. Tax planning us 1040a A sole proprietor is treated as his or her own employer for retirement plan purposes. Tax planning us 1040a However, a partner is not an employer for retirement plan purposes. Tax planning us 1040a Instead, the partnership is treated as the employer of each partner. Tax planning us 1040a Highly compensated employee. Tax planning us 1040a   A highly compensated employee is an individual who: Owned more than 5% of the interest in your business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or For the preceding year, received compensation from you of more than $115,000 (if the preceding year is 2012, 2013, or 2014) and, if you so choose, was in the top 20% of employees when ranked by compensation. Tax planning us 1040a Leased employee. Tax planning us 1040a   A leased employee who is not your common-law employee must generally be treated as your employee for retirement plan purposes if he or she does all the following. Tax planning us 1040a Provides services to you under an agreement between you and a leasing organization. Tax planning us 1040a Has performed services for you (or for you and related persons) substantially full time for at least 1 year. Tax planning us 1040a Performs services under your primary direction or control. Tax planning us 1040a Exception. Tax planning us 1040a   A leased employee is not treated as your employee if all the following conditions are met. Tax planning us 1040a Leased employees are not more than 20% of your non-highly compensated work force. Tax planning us 1040a The employee is covered under the leasing organization's qualified pension plan. Tax planning us 1040a The leasing organization's plan is a money purchase pension plan that has all the following provisions. Tax planning us 1040a Immediate participation. Tax planning us 1040a (This requirement does not apply to any individual whose compensation from the leasing organization in each plan year during the 4-year period ending with the plan year is less than $1,000. Tax planning us 1040a ) Full and immediate vesting. Tax planning us 1040a A nonintegrated employer contribution rate of at least 10% of compensation for each participant. Tax planning us 1040a However, if the leased employee is your common-law employee, that employee will be your employee for all purposes, regardless of any pension plan of the leasing organization. Tax planning us 1040a Net earnings from self-employment. Tax planning us 1040a   For SEP and qualified plans, net earnings from self-employment is your gross income from your trade or business (provided your personal services are a material income-producing factor) minus allowable business deductions. Tax planning us 1040a Allowable deductions include contributions to SEP and qualified plans for common-law employees and the deduction allowed for the deductible part of your self-employment tax. Tax planning us 1040a   Net earnings from self-employment does not include items excluded from gross income (or their related deductions) other than foreign earned income and foreign housing cost amounts. Tax planning us 1040a   For the deduction limits, earned income is net earnings for personal services actually rendered to the business. Tax planning us 1040a You take into account the income tax deduction for the deductible part of self-employment tax and the deduction for contributions to the plan made on your behalf when figuring net earnings. Tax planning us 1040a   Net earnings include a partner's distributive share of partnership income or loss (other than separately stated items, such as capital gains and losses). Tax planning us 1040a It does not include income passed through to shareholders of S corporations. Tax planning us 1040a Guaranteed payments to limited partners are net earnings from self-employment if they are paid for services to or for the partnership. Tax planning us 1040a Distributions of other income or loss to limited partners are not net earnings from self-employment. Tax planning us 1040a   For SIMPLE plans, net earnings from self-employment is the amount on line 4 of Short Schedule SE or line 6 of Long Schedule SE (Form 1040), Self-Employment Tax, before subtracting any contributions made to the SIMPLE plan for yourself. Tax planning us 1040a Qualified plan. Tax planning us 1040a   A qualified plan is a retirement plan that offers a tax-favored way to save for retirement. Tax planning us 1040a You can deduct contributions made to the plan for your employees. Tax planning us 1040a Earnings on these contributions are generally tax free until distributed at retirement. Tax planning us 1040a Profit-sharing, money purchase, and defined benefit plans are qualified plans. Tax planning us 1040a A 401(k) plan is also a qualified plan. Tax planning us 1040a Participant. Tax planning us 1040a   A participant is an eligible employee who is covered by your retirement plan. Tax planning us 1040a See the discussions of the different types of plans for the definition of an employee eligible to participate in each type of plan. Tax planning us 1040a Partner. Tax planning us 1040a   A partner is an individual who shares ownership of an unincorporated trade or business with one or more persons. Tax planning us 1040a For retirement plans, a partner is treated as an employee of the partnership. Tax planning us 1040a Self-employed individual. Tax planning us 1040a   An individual in business for himself or herself, and whose business is not incorporated, is self-employed. Tax planning us 1040a Sole proprietors and partners are self-employed. Tax planning us 1040a Self-employment can include part-time work. Tax planning us 1040a   Not everyone who has net earnings from self-employment for social security tax purposes is self-employed for qualified plan purposes. Tax planning us 1040a See Common-law employee and Net earnings from self-employment , earlier. Tax planning us 1040a   In addition, certain fishermen may be considered self-employed for setting up a qualified plan. Tax planning us 1040a See Publication 595, Capital Construction Fund for Commercial Fishermen, for the special rules used to determine whether fishermen are self-employed. Tax planning us 1040a Sole proprietor. Tax planning us 1040a   A sole proprietor is an individual who owns an unincorporated business by himself or herself, including a single member limited liability company that is treated as a disregarded entity for tax purposes. Tax planning us 1040a For retirement plans, a sole proprietor is treated as both an employer and an employee. 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Understanding your CP08 Notice

You may qualify for the Additional Child Tax Credit and be entitled to some additional money.

Printable samples of this notice (PDF)

Tax publications you may find useful

How to get help

Calling the 1-800 number listed on the top right corner of your notice is the fastest way to get your questions answered.

You can also authorize someone (such as an accountant) to contact the IRS on your behalf using this Power of Attorney and Declaration of Representative (Form 2848).

Or you may qualify for help from a Low Income Taxpayer Clinic.
 


What you need to do

  • Read your notice carefully.
  • Complete the Additional Child Tax Credit Worksheet. If the worksheet confirms that you have at least one qualifying child, sign and date the worksheet, and complete Form 1040 Schedule 8812.
  • Mail both the worksheet and Form 1040 Schedule 8812 in the envelope provided.

You may want to...


Answers to Common Questions

I lost the return envelope. Where do I mail my worksheet and Form 8812?
Mail the worksheet and form to the address listed on the top left corner of the worksheet. This is the IRS center that handles cases in your region, so it’s important you send it there to avoid potential delays in processing.

What’s the difference between the "Child Tax Credit" and the "Additional Child Tax Credit"? Can I qualify for both?
The Child Tax Credit is for people who have a qualifying child. The maximum amount you can claim is $1000 for each qualifying child. The Additional Child Tax Credit is for individuals who receive less than the full amount of Child Tax Credit. You may qualify for both the Child Tax Credit and the Additional Child Tax Credit.

I sent you my worksheet and form. When will I get the refund?
We’ll review your form and worksheet and make a determination for your credit. If we deny your credit, we’ll send you a letter explaining why, but if you owe no other amount, you should receive your refund in 8 to 10 weeks. If you don't hear from us after 8 to 10 weeks, call our "Where’s My Refund?" toll free line at 1-800-829-1954 to check on the status of your refund.

My son/daughter is turning 18 this year. Can I still get the Additional Child Tax Credit?
No. Your child must be under age 17 at the end of 2009 to qualify for both the Child Tax Credit and the Additional Child Tax Credit.


Tips for next year

If you have dependent children, remember to claim the Additional Child Tax Credit the next time your file your 1040 or 1040A tax return. To do this, complete and attach Form 1040 Schedule 8812 to your return.

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

Page Last Reviewed or Updated: 28-Mar-2014

The Tax Planning Us 1040a

Tax planning us 1040a 4. Tax planning us 1040a   Detailed Examples Table of Contents These examples use actual forms to help you prepare your income tax return. Tax planning us 1040a However, the information shown on the filled-in forms is not from any actual person or scenario. Tax planning us 1040a Example 1—Mortgage loan modification. Tax planning us 1040a    In 2007, Nancy Oak bought a main home for $435,000. Tax planning us 1040a Nancy took out a $420,000 mortgage loan to buy the home and made a down payment of $15,000. Tax planning us 1040a The loan was secured by the home. Tax planning us 1040a The mortgage loan was a recourse debt, meaning that Nancy was personally liable for the debt. Tax planning us 1040a 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. Tax planning us 1040a    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. Tax planning us 1040a The FMV of Nancy's home at the time of the refinancing was $500,000. Tax planning us 1040a 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. Tax planning us 1040a 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. Tax planning us 1040a   In 2013, Nancy was unable to make her mortgage loan payments. Tax planning us 1040a 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. Tax planning us 1040a Nancy was neither insolvent nor in bankruptcy at the time of the loan modification. Tax planning us 1040a   Nancy received a 2013 Form 1099-C from her bank in January 2014 showing canceled debt of $40,000 in box 2. Tax planning us 1040a Identifiable event code "F" appears in box 6. Tax planning us 1040a This box shows the reason the creditor has filed Form 1099-C. Tax planning us 1040a 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. Tax planning us 1040a Nancy determines that the only exception or exclusion that applies to her is the qualified principal residence indebtedness exclusion. Tax planning us 1040a   Next, Nancy determines the amount, if any, of the $40,000 of canceled debt that was qualified principal residence indebtedness. Tax planning us 1040a 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. Tax planning us 1040a 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. Tax planning us 1040a 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). Tax planning us 1040a   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. Tax planning us 1040a 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). Tax planning us 1040a Nancy must also include the $35,000 nonqualified debt portion in income on Form 1040, line 21. Tax planning us 1040a You can see Nancy's Form 1099-C and a portion of her Form 1040 below. Tax planning us 1040a Nancy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Tax planning us 1040a Please click the link to view the image. Tax planning us 1040a Form 1099-C, Cancellation of Debt Nancy's 2013 Form 1040 This image is too large to be displayed in the current screen. Tax planning us 1040a Please click the link to view the image. Tax planning us 1040a Form 1040, U. Tax planning us 1040a S. Tax planning us 1040a Individual Income Tax Nancy's Form 982 This image is too large to be displayed in the current screen. Tax planning us 1040a Please click the link to view the image. Tax planning us 1040a Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)              Example 2—Mortgage loan foreclosure. Tax planning us 1040a    In 2005, John and Mary Elm bought a main home for $335,000. Tax planning us 1040a John and Mary took out a $320,000 mortgage loan to buy the home and made a down payment of $15,000. Tax planning us 1040a The loan was secured by the home and is a recourse debt, meaning John and Mary are personally liable for the debt. Tax planning us 1040a   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. Tax planning us 1040a 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. Tax planning us 1040a   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. Tax planning us 1040a Identifiable event code "D" appears in box 6. Tax planning us 1040a This box shows the reason the creditor has filed Form 1099-C. Tax planning us 1040a 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. Tax planning us 1040a In this example, John and Mary meet both the insolvency and qualified principal residence indebtedness exclusions. Tax planning us 1040a Their sample Form 1099-C is shown on this page. Tax planning us 1040a   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). Tax planning us 1040a 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. Tax planning us 1040a   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). Tax planning us 1040a Instead, John and Mary check box 1e of Form 982 to exclude the canceled debt under the qualified principal residence exclusion. Tax planning us 1040a 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. Tax planning us 1040a As a result, John and Mary enter the full $25,000 of canceled debt on line 2 of Form 982. Tax planning us 1040a 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. Tax planning us 1040a Thus, John and Mary leave line 10b of Form 982 blank. Tax planning us 1040a   John and Mary must also determine whether they have a gain or loss from the foreclosure. Tax planning us 1040a John and Mary complete Table 1-1 (shown below) and find that they have a $45,000 loss from the foreclosure. Tax planning us 1040a Because this loss relates to their home, it is a nondeductible loss. Tax planning us 1040a   John and Mary's Form 1099-C, Insolvency Worksheet, and Form 982 follow. Tax planning us 1040a John and Mary's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Tax planning us 1040a Please click the link to view the image. Tax planning us 1040a Form 1099-C, Cancellation of Debt Table 1-1. Tax planning us 1040a Worksheet for Foreclosures and Repossessions (for John and Mary Elm) Part 1. Tax planning us 1040a Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Tax planning us 1040a Otherwise, go to Part 2. Tax planning us 1040a 1. Tax planning us 1040a 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. Tax planning us 1040a 00 2. Tax planning us 1040a Enter the fair market value of the transferred property $290,000. Tax planning us 1040a 00 3. Tax planning us 1040a Ordinary income from the cancellation of debt upon foreclosure or repossession. Tax planning us 1040a * Subtract line 2 from line 1. Tax planning us 1040a If less than zero, enter zero. Tax planning us 1040a Next, go to Part 2 $ 25,000. Tax planning us 1040a 00 Part 2. Tax planning us 1040a Gain or loss from foreclosure or repossession. Tax planning us 1040a   4. Tax planning us 1040a Enter the smaller of line 1 or line 2. Tax planning us 1040a 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. Tax planning us 1040a 00 5. Tax planning us 1040a Enter any proceeds you received from the foreclosure sale   6. Tax planning us 1040a Add line 4 and line 5 $290,000. Tax planning us 1040a 00 7. Tax planning us 1040a Enter the adjusted basis of the transferred property $335,000. Tax planning us 1040a 00 8. Tax planning us 1040a Gain or loss from foreclosure or repossession. Tax planning us 1040a Subtract line 7 from line 6 ($ 45,000. Tax planning us 1040a 00) * The income may not be taxable. Tax planning us 1040a See chapter 1 for more details. Tax planning us 1040a Insolvency Worksheet—John and Mary Elm Date debt was canceled (mm/dd/yy) 03/01/13 Part I. Tax planning us 1040a 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. Tax planning us 1040a Credit card debt $ 5,500 2. Tax planning us 1040a 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. Tax planning us 1040a Car and other vehicle loans $ 4. Tax planning us 1040a Medical bills owed $ 5. Tax planning us 1040a Student loans $ 6. Tax planning us 1040a Accrued or past-due mortgage interest $ 7. Tax planning us 1040a Accrued or past-due real estate taxes $ 8. Tax planning us 1040a Accrued or past-due utilities (water, gas, electric) $ 9. Tax planning us 1040a Accrued or past-due child care costs $ 10. Tax planning us 1040a Federal or state income taxes remaining due (for prior tax years) $ 11. Tax planning us 1040a Judgments $ 12. Tax planning us 1040a Business debts (including those owed as a sole proprietor or partner) $ 13. Tax planning us 1040a Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. Tax planning us 1040a Other liabilities (debts) not included above $ 15. Tax planning us 1040a Total liabilities immediately before the cancellation. Tax planning us 1040a Add lines 1 through 14. Tax planning us 1040a $ 320,500 Part II. Tax planning us 1040a 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. Tax planning us 1040a Cash and bank account balances $ 6,000 17. Tax planning us 1040a 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. Tax planning us 1040a Cars and other vehicles $ 19. Tax planning us 1040a Computers $ 20. Tax planning us 1040a Household goods and furnishings (for example, appliances, electronics, furniture, etc. Tax planning us 1040a ) $ 21. Tax planning us 1040a Tools $ 22. Tax planning us 1040a Jewelry $ 23. Tax planning us 1040a Clothing $ 24. Tax planning us 1040a Books $ 25. Tax planning us 1040a Stocks and bonds $ 26. Tax planning us 1040a Investments in coins, stamps, paintings, or other collectibles $ 27. Tax planning us 1040a Firearms, sports, photographic, and other hobby equipment $ 28. Tax planning us 1040a Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 13,000 29. Tax planning us 1040a Interest in a pension plan $ 30. Tax planning us 1040a Interest in education accounts $ 31. Tax planning us 1040a Cash value of life insurance $ 32. Tax planning us 1040a Security deposits with landlords, utilities, and others $ 33. Tax planning us 1040a Interests in partnerships $ 34. Tax planning us 1040a Value of investment in a business $ 35. Tax planning us 1040a Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. Tax planning us 1040a Other assets not included above $ 37. Tax planning us 1040a FMV of total assets immediately before the cancellation. Tax planning us 1040a Add lines 16 through 36. Tax planning us 1040a $ 309,000 Part III. Tax planning us 1040a Insolvency 38. Tax planning us 1040a Amount of Insolvency. Tax planning us 1040a Subtract line 37 from line 15. Tax planning us 1040a If zero or less, you are not insolvent. Tax planning us 1040a $ 11,500 John and Mary's Form 982 This image is too large to be displayed in the current screen. Tax planning us 1040a Please click the link to view the image. Tax planning us 1040a 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. Tax planning us 1040a    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. Tax planning us 1040a 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. Tax planning us 1040a Kathy and Frank are personally liable for the mortgage loan, which is secured by the home. Tax planning us 1040a   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. Tax planning us 1040a The lender foreclosed on the property and, on December 5, 2013, sold the property to another buyer for $1,750,000. Tax planning us 1040a On December 26, 2013, the lender canceled the remaining debt. Tax planning us 1040a Kathy and Frank have no tax attributes other than basis of personal-use property. Tax planning us 1040a   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). Tax planning us 1040a Identifiable event code "D" appears in box 6. Tax planning us 1040a This box shows the reason the creditor has filed Form 1099-C. Tax planning us 1040a 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. Tax planning us 1040a Kathy and Frank are filing a joint return for 2013. Tax planning us 1040a   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. Tax planning us 1040a 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). Tax planning us 1040a 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. Tax planning us 1040a Because this loss relates to their home, it is a nondeductible loss. Tax planning us 1040a   Because the lender later canceled the remaining amount of the debt, Kathy and Frank must also determine whether that canceled debt is taxable. Tax planning us 1040a 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. Tax planning us 1040a Kathy and Frank also had the $750,000 remaining balance on the mortgage loan at that time. Tax planning us 1040a The household furnishings originally cost $30,000. Tax planning us 1040a The car had been fully paid off (so there was no related outstanding debt) and was originally purchased for $16,000. Tax planning us 1040a Kathy and Frank had no adjustments to the cost basis of the car. Tax planning us 1040a Kathy and Frank had no other assets or liabilities at the time of the cancellation. Tax planning us 1040a 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). Tax planning us 1040a   At the beginning of 2014, Kathy and Frank had $9,000 in their savings account and $15,000 in credit card debt. Tax planning us 1040a 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). Tax planning us 1040a Kathy and Frank had no other assets or liabilities at that time. Tax planning us 1040a Kathy and Frank no longer own the home because the lender foreclosed on it in 2013. Tax planning us 1040a   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. Tax planning us 1040a The maximum amount that Kathy and Frank can treat as qualified principal residence indebtedness is $2,000,000. Tax planning us 1040a 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. Tax planning us 1040a Because only a part of the loan is qualified principal residence indebtedness, Kathy and Frank must apply the ordering rule to the canceled debt. Tax planning us 1040a 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). Tax planning us 1040a 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. Tax planning us 1040a   Kathy and Frank do not elect to have the insolvency exclusion apply instead of the qualified principal residence exclusion. Tax planning us 1040a Nonetheless, they can still apply the insolvency exclusion to the $500,000 nonqualified debt because it is not qualified principal residence indebtedness. Tax planning us 1040a 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. Tax planning us 1040a 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). Tax planning us 1040a   Next, Kathy and Frank reduce their tax attributes using Part II of Form 982. Tax planning us 1040a 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. Tax planning us 1040a Thus, Kathy and Frank leave line 10b of Form 982 blank. Tax planning us 1040a However, Kathy and Frank are also excluding nonqualified debt under the insolvency exclusion. Tax planning us 1040a 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. Tax planning us 1040a 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). Tax planning us 1040a 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. Tax planning us 1040a Kathy and Frank reduce the basis in the car by $14,956. Tax planning us 1040a 52 ($43,000 x $16,000/$46,000). Tax planning us 1040a And they reduce the basis in the household furnishings by $28,043. Tax planning us 1040a 48 ($43,000 x $30,000/$46,000). Tax planning us 1040a   Following are Kathy and Frank's sample forms and worksheets. Tax planning us 1040a Frank and Kathy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Tax planning us 1040a Please click the link to view the image. Tax planning us 1040a Form 1099-C, Cancellation of Debt Table 1-1. Tax planning us 1040a Worksheet for Foreclosures and Repossessions (for Frank and Kathy Willow) Part 1. Tax planning us 1040a Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Tax planning us 1040a Otherwise, go to Part 2. Tax planning us 1040a 1. Tax planning us 1040a 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. Tax planning us 1040a 00 2. Tax planning us 1040a Enter the fair market value of the transferred property $1,750,000. Tax planning us 1040a 00 3. Tax planning us 1040a Ordinary income from the cancellation of debt upon foreclosure or repossession. Tax planning us 1040a * Subtract line 2 from line 1. Tax planning us 1040a If less than zero, enter zero. Tax planning us 1040a Next, go to Part 2 $0. Tax planning us 1040a 00 Part 2. Tax planning us 1040a Gain or loss from foreclosure or repossession. Tax planning us 1040a   4. Tax planning us 1040a Enter the smaller of line 1 or line 2. Tax planning us 1040a 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. Tax planning us 1040a $1,750,000. Tax planning us 1040a 00 5. Tax planning us 1040a Enter any proceeds you received from the foreclosure sale   6. Tax planning us 1040a Add line 4 and line 5 $1,750,000. Tax planning us 1040a 00 7. Tax planning us 1040a Enter the adjusted basis of the transferred property $3,000,000. Tax planning us 1040a 00 8. Tax planning us 1040a Gain or loss from foreclosure or repossession. Tax planning us 1040a Subtract line 7 from line 6 ($1,250,000. Tax planning us 1040a 00) * The income may not be taxable. Tax planning us 1040a See chapter 1 for more details. Tax planning us 1040a    Insolvency Worksheet—Frank and Kathy Willow Date debt was canceled (mm/dd/yy) 12/26/13 Part I. Tax planning us 1040a 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. Tax planning us 1040a Credit card debt $ 18,000 2. Tax planning us 1040a 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. Tax planning us 1040a Car and other vehicle loans $ 4. Tax planning us 1040a Medical bills owed $ 5. Tax planning us 1040a Student loans $ 6. Tax planning us 1040a Accrued or past-due mortgage interest $ 7. Tax planning us 1040a Accrued or past-due real estate taxes $ 8. Tax planning us 1040a Accrued or past-due utilities (water, gas, electric) $ 9. Tax planning us 1040a Accrued or past-due child care costs $ 10. Tax planning us 1040a Federal or state income taxes remaining due (for prior tax years) $ 11. Tax planning us 1040a Judgments $ 12. Tax planning us 1040a Business debts (including those owed as a sole proprietor or partner) $ 13. Tax planning us 1040a Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. Tax planning us 1040a Other liabilities (debts) not included above $ 15. Tax planning us 1040a Total liabilities immediately before the cancellation. Tax planning us 1040a Add lines 1 through 14. Tax planning us 1040a $ 768,000 Part II. Tax planning us 1040a 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. Tax planning us 1040a Cash and bank account balances $ 15,000 17. Tax planning us 1040a 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. Tax planning us 1040a Cars and other vehicles $ 10,000 19. Tax planning us 1040a Computers $ 20. Tax planning us 1040a Household goods and furnishings (for example, appliances, electronics, furniture, etc. Tax planning us 1040a ) $ 17,000 21. Tax planning us 1040a Tools $ 22. Tax planning us 1040a Jewelry $ 23. Tax planning us 1040a Clothing $ 24. Tax planning us 1040a Books $ 25. Tax planning us 1040a Stocks and bonds $ 26. Tax planning us 1040a Investments in coins, stamps, paintings, or other collectibles $ 27. Tax planning us 1040a Firearms, sports, photographic, and other hobby equipment $ 28. Tax planning us 1040a Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 29. Tax planning us 1040a Interest in a pension plan $ 30. Tax planning us 1040a Interest in education accounts $ 31. Tax planning us 1040a Cash value of life insurance $ 32. Tax planning us 1040a Security deposits with landlords, utilities, and others $ 33. Tax planning us 1040a Interests in partnerships $ 34. Tax planning us 1040a Value of investment in a business $ 35. Tax planning us 1040a Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. Tax planning us 1040a Other assets not included above $ 37. Tax planning us 1040a FMV of total assets immediately before the cancellation. Tax planning us 1040a Add lines 16 through 36. Tax planning us 1040a $ 42,000 Part III. Tax planning us 1040a Insolvency 38. Tax planning us 1040a Amount of Insolvency. Tax planning us 1040a Subtract line 37 from line 15. Tax planning us 1040a If zero or less, you are not insolvent. Tax planning us 1040a $ 726,000    Frank and Kathy's Form 982 This image is too large to be displayed in the current screen. Tax planning us 1040a Please click the link to view the image. Tax planning us 1040a Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Prev  Up  Next   Home   More Online Publications