Tax Planning

Important Facts about Mortgage Debt Forgiveness

If your lender cancelled or forgave your mortgage debt, you generally have to pay tax on that amount. But there are exceptions to this rule for some homeowners who had mortgage debt forgiven in 2012.

Here are 10 key facts from the IRS about mortgage debt forgiveness:

1. Cancelled debt normally results in taxable income. However, you may be able to exclude the cancelled debt from your income if the debt was a mortgage on your main home.

2. To qualify, you must have used the debt to buy, build or substantially improve your principal residence. The residence must also secure the mortgage.

3. The maximum qualified debt that you can exclude under this exception is $2 million. The limit is $1 million for a married person who files a separate tax return.

4. You may be able to exclude from income the amount of mortgage debt reduced through mortgage restructuring. You may also be able to exclude mortgage debt cancelled in a foreclosure.

5. You may also qualify for the exclusion on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or substantially improve your main home. The exclusion is limited to the amount of the old mortgage principal just before the refinancing.

6. Proceeds of refinanced mortgage debt used for other purposes do not qualify for the exclusion. For example, debt used to pay off credit card debt does not qualify.

7. If you qualify, report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Submit the completed form with your federal income tax return.

8. Other types of cancelled debt do not qualify for this special exclusion. This includes debt cancelled on second homes, rental and business property, credit cards or car loans. In some cases, other tax relief provisions may apply, such as debts discharged in certain bankruptcy proceedings. Form 982 provides more details about these provisions.

9. If your lender reduced or cancelled at least $600 of your mortgage debt, they normally send you a statement in January of the next year. Form 1099-C, Cancellation of Debt, shows the amount of cancelled debt and the fair market value of any foreclosed property.

10. Check your Form 1099-C for the cancelled debt amount shown in Box 2, and the value of your home shown in Box 7. Notify the lender immediately of any incorrect information so they can correct the form.

Use the Interactive Tax Assistant tool on to check if your cancelled debt is taxable. Also, see Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. IRS forms and publications are available online at or by calling 800-TAX-FORM (800-829-3676).
Additional IRS Resources:

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9 Tax Filing Mistakes to Avoid

It’s OK–fearing tax season is perfectly reasonable because when it comes to deductions, credits and filing status, there’s a lot to learn–and mess up. (Don’t shoot the messenger! Write to Congress!)

Our goal is to keep you far away from IRS auditors, while making sure that you pay as little as (legally!) possible. We’ve broken down the top mistakes you should avoid point by point–translated from IRS speak–so you can sleep soundly at night.

1. Don’t … Keep Poor Records

Unless you have devastatingly simple finances (no real estate property, one salaried job, simple or no investments, etc.), then you’ll need to keep yourself organized for tax season, so you’re not left scrambling to find documentation or fudging the numbers on your return–that can set you up for an audit!

What to do: Make sure you have easy access to all of these records from the past year:

  • Government confirmation of your return and refund from last year. Order a return transcript from the IRS.
  • Records of charitable donations, including receipts. Charitable organizations often send out a year-end summary of how much you donated. If yours doesn’t, contact them to request a receipt or use bank statements or cancelled checks.
  • Large medical or dental bills
  • Records of business or job hunting costs
  • Forms from your job(s) showing how much income you’ve made. You can request documentation of your salary from your HR department, if they haven’t sent it to you already. (If you have a full-time job, that will be your W-2. If you freelance, you’ll need 1099s from each client.)
  • Purchases, sales and improvements to real estate property
  • All actions in your investment and IRA accounts. Most online brokerages will keep records for you–just log in to download your documents.

Better yet, get yourself into a paperless filing system, such as linking your accounts in LearnVest’s Money Center, so that you have a searchable database of transactions and donations.

2. Don’t … Pay for an Accountant You Don’t Need (or Fail to Get One When You Should)

If you have simple finances–you are a salaried employee, and don’t hold complicated or high volume investments, for example–all you need is a couple of hours to do the job yourself through an online filing program. (Bonus: You’ll save yourself a few hundred.) But if your finances are complicated, you risk losing out on deductions and credits that could make paying a professional worth it.

What to do: If you think that you should probably have an accountant, ask friends and family for a referral or visit to search for an accredited accountant. Just be aware that you may be charged more for a rush job. If you cannot find one at the last minute, take our Ace Your Taxes Bootcamp, and make full use of our tax resources in the Knowledge Center to answer any questions.

3. Don’t … Choose the Wrong Filing Status

Your filing status (single, married filing jointly, married filing separately or head of household) determines how you treat many tax decisions, such as what forms you’ll fill out, which deductions and credits you’ll take and how much you will pay (or save) in taxes. Select the wrong status, and it will trigger a cascade of mistakes–maybe even an audit. On top of that, if you decide to file jointly with your spouse, this means you’re responsible for any errors or deliberate falsehoods on your partner’s return, so make sure that you’re comfortable with what it says.

How to File Your Tax Return

You may have done the hard work to find your deductions and credits, choose your filing status, and even itemize, but it’s all for naught if you don’t file your tax return!

Thanks to technology, filing your return is getting easier and easier. But there are still some nuances to know. Find out which way you should file—electronically or by mail—and how to do it.

Electronic or Paper Filing?

E-filing is the preferred way to file, because it is faster, more convenient and more secure than paper filing.

Think about it: If you e-file, all your information is automatically entered into the system, while a paper return has to be retyped by an IRS employee, which introduces more opportunity for errors. If you e-file, you’ll get confirmation within 48 hours that your return was received. You can get your refund (if you have one) deposited directly to your account more quickly, typically in as few as ten days. For e-file users, you also have more payment options, including setting up an automatic payment withdrawal date for any day before the April due date. You can also pay by paper check or even by credit card!

However, there are some instances where you are not able to file an electronic return. You must paper file if:

  • You’re married, but filing a separate return, and you live in a community property state
  • You are claiming a dependent who has already been claimed by someone else
  • You are filing forms that require paper documentation. For example, the first-time homebuyer credit requires paper filing
  • You file before e-filing begins (it started on January 30th this year) or after it ends (October)

How to File an Electronic Return

There are several ways to file electronically:

If you’re paying a tax professional to prepare your return, they will e-file for you. Many are required by law to e-file, but still make sure to mention it to them so you get your refund faster.

If you are using commercial tax software, e-filing is included. Just submit through the software when you are done. Incidentally, e-filing is including in the discount TaxACT package every participant in our Ace Your Taxes Bootcamp receives.

If you’re preparing your own return, you can file for free. Those who have an AGI under $57,000 can use what the IRS calls Free File. If your AGI is over $57,000, you can use fillable forms, which are electronic versions of the IRS’s paper forms and are still free.

How to File a Paper Return

If you need to file a paper form, or just prefer paper forms and don’t mind the longer wait for your refund, you can do it the old-fashioned way. The IRS will not mail you your forms ahead of time like they used to, so first you’ll need to pick and download your forms. Find out which ones you need.

When you’re ready to send in your return, make sure your name and Social Security Number are on the front and back of every page. Make a photocopy of your return for your records. Then, check the IRS for where to send your return, according to which state you live in.

We recommend you send your return by registered or certified mail. You will be able to track its progress and see that it was delivered. Make sure the registered date is on or before April 15, 2013, this year’s filing date.

You can also send by private delivery service. Use an IRS-approved one such as DHL, FedEx or UPS, but beware that private delivery services cannot mail to post office boxes, so you must use the addresses in this list. Whichever mailing service you use, save your receipt.

How to Do Your Taxes if You’re Married

A lot of your tax decisions depend on your relationship status.

So if you just got married in 2012, mazel tov! Things are about to change for you—and one of those changes involves your taxes.

And even if you’ve done this whole couples tax thing before, it’s helpful to understand how being married affects your taxes.

Here’s what you need to know. Skim the headings to zoom in on the information that is relevant to your particular situation:

Take This Status

If you were married (and not legally separated) on December 31st, 2012, then you will file married either jointly or separately.

Married Filing Jointly

The typical choice for married couples, this should save you big in taxes. You are eligible for more deductions and credits, and it will simplify your tax filing significantly. Find out how combining your salaries will affect your taxes.

To learn more about filing status, use our flow chart to determine which is right for you.

Married Filing Separately

Married filing separately is just like it sounds: You have a spouse, but each of you will file a separate return, and keep your finances separate: separate incomes, separate expenses, everything.

If you got this as your filing status, you must have a really good reason. The IRS discourages couples from filing under this status by preventing couples filing separately from taking many deductions and credits available to married couples filing jointly. Plus, it’s twice the work for you and your spouse to file separately! However, there are some cases where it’s in your interest to file separately.

1. You or your partner has large deductible expenses: If you or your spouse has a large expense that might be deductible, it must be more than a certain percentage of your AGI (figure out your AGI) in order to qualify as deductible.

So let’s say you had a medical expense that cost you $5,000. If you file separately and your AGI is $50,000, the medical expense was 10% of your AGI and you can deduct a portion of it.

But if you file jointly with your spouse, who has an AGI of just $30,000, that means the medical expense was only 6.25% of your combined AGI, and you can no longer deduct it, which means you could be missing out on some tax savings. (Read our post on deductions to see which ones you might qualify for.)

But look at your entire financial picture to decide whether filing separately makes sense for you, because you may miss out on other deductions by doing so. We suggest getting an accountant, or working out the math for filing separately and jointly to see which nets you a lower tax bill.

2. Your spouse has a business: Instead of being a math equation, this decision is based on how comfortable you feel with combining your interests with your spouse’s.

If you file a joint return, you will be liable with your spouse for any audits, fines and interest on unpaid taxes, as this woman learned the hard way when she found out she owed $3 million to the IRS because she had no idea her late husband was cheating on his taxes.

Even well-meaning business owners can make mistakes. For example, this business owner made an honest mistake that resulted in fines. If you’ve ever heard the words, “I can’t figure out these freakin’ taxes,” or worse, “Taxes are stupid, and I don’t believe in paying them,” come out of your spouse’s mouth, file a separate return.

If, however, you are ever caught in situation like this, don’t panic; the IRS has two special publications just for you. The first is called Innocent Spouse Relief, and you can claim it when your spouse does something shady that you didn’t know about. The second is called Injured Spouse, and it can be claimed by you when your spouse owes child support or money to the IRS, and you want your fair share of the refund.

3. You suspect your spouse is not on the up-and-up with the IRS: While we hope this isn’t the case, we have to suggest you protect your own finances and file separately from him.

Should You Contact a Tax Attorney?

How do you know if you need a tax attorney?

Tax attorneys are lawyers who specialize in the complex and technical field of tax law. According to this article from, you definitely need a tax attorney if:

  • You have a taxable estate, need to make complex estate planning strategies, or need to file an estate tax return.
  • You are starting a business and need legal counsel about the structure and tax treatment of your company.
  • You are engaging in international business and need help with contracts, tax treatment, and other legal matters.
  • You plan to bring a suit against the IRS.
  • You plan to seek independent review of your case before the US Tax Court.
  • You are under criminal investigation by the IRS.
  • You have committed tax fraud (such as claiming false deductions and credits) and need the protection of privilege.

But what if you’re already mired in tax debt and can’t afford to hire an attorney? Low Income Taxpayer Clinics (LITCs) represent low income taxpayers before the IRS and assist taxpayers in audits, appeals and collection disputes. These clinics, which are operated by nonprofit organizations or academic institutions, can also help taxpayers respond to IRS notices and correct account problems.

Another option is to seek assistance from a referral system operated by a state bar association, a state or local society of accountants or enrolled agents, or another nonprofit tax professional organization.

Debt settlement companies are not law firms and cannot provide legal advice. However, debt settlement can be a part of your solution to tax debt. Debt settlement means that your debt is negotiated down to a reduced amount and paid off in a lump sum. Settlement is a good choice if you have more debt than you can pay off within two to three years or are experiencing a financial hardship that has you falling behind on your monthly payments.