Tax bills on forgiven debt in your future?
Here's another piece of news I meant to put out earlier. A cluster of consumer advocacy groups in the state are warning Marylanders that even as thousands of homeowners are suffering through the loss of their home through foreclosure, that could just be the beginning your financial troubles.
Here's why: If you, the homeowner, has part of your debt forgiven during the foreclosure process, you're required to include the forgiven amount as income on your tax return. This amount is called a "windfall" and often taxes will be owed on that amount, according to the Maryland Consumer Rights Coalition, Maryland CASH Campaign and Baltimore CASH Campaign.
Forgiven debt in a foreclosure can range from a few thousand dollars to hundreds of thousands, which means the taxes owed can be significant. The groups warned that federal and state tax debt usually cannot be discharged through bankruptcy so consumers should contact their tax preparer immediately if you have canceled debt, known as the "1099 shortfall."
There are a few scenarious in which a "windfall" can occur: The increase "income" bumps you into a new tax bracket and you lose out on critical tax credits and exemptions; you owe taxes on forgiven debt and are unable and unprepared to pay for it because you never daw the forgiven amount as cash and had no funds put aside for the taxes; or you are forced to sell your home for less than the value of the mortgage to avoid foreclosure.
There are few free resources available to help negotiate with the Internal Revenue Service. You need to be pro-active and contact your mortgage holder early to talk about restructuring your loan if you can't pay it. NOT paying is NOT a good option, the consumer advocates say. If you're having trouble paying your mortgage, you can get free, immediate counseling by calling 888.995.HOPE.
Taxpayers making less the $40,000 may qualify for free tax preparation and free legal representation. Contact 800.492.0618 for a listing of free tax preparation sites. For existing tax disputes, contact Maryland Volunteer Lawyers SErvice at 800.510.0050.
One final note, if you're having trouble resolving an IRS bill, letter, or notice through normal IRS channels, contact the Taxpayer Advocate Service intake line at 877.777.4778 or TTY/TDD 800.829.4059.
Good luck out there!
Categories: Debt, Home/Real Estate, Personal finance
