One of the biggest things I saw this year was forgiven debt. The debt that some of my clients had was 1099-A and 1099-C debt which came from the short sale of a house or simply getting foreclosed on.
This is a huge sticker shock for a lot of people and you can save yourself a lot of wholesale aggrevation by anticipating that you will get the forms if you are short selling your home or if you have lost it due to non-payment.
The bank treats it as a forgiven debt and shows that you have, on paper at least, received income in the form of “free money” or debt reduction.
What happens is that you are forgiven some or all of your debt but the bank or creditor issues you a 1099-A or 1099-C that shows you how much debt was forgiven and the value of the propery. If this is going to happen to you during 2010, please make sure that you complete a bankruptcy or insolvency worksheet. You need to be able to show what your net worth was just before the bankruptcy or loss of the house and the purpose for it is so that when you try to complete Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)). You might be able get waived the taxes you will be charged on your forgiven debt that way.
If you have any tax questions. Drop me a line.
April 19 2010
Tax Planning for 2010 With Debt Issues
Be safe and sane people.
Kim Isaac Greenblatt