Is Canceled Debt Taxable?

Generally, debt that is forgiven or canceled by a lender is considered taxable income by the Internal Revenue Service and must be included as income on your tax return.  Examples include a debt for which you are personally liable such as mortgage debt, credit card debt, and in some instances, student loan debt.  When that debt is forgiven, negotiated down (when you pay less than you owe), or canceled you will receive Form 1099-C, Cancellation of Debt, from your financial institution.  Form 1099-C shows the amount of cancelled or forgiven debt that was report to the IRS.  Creditors who forgive $600 or more of debt are required to issue this form. 

If you receive a form 1099-C, don’t ignore it!  You may not have to report that entire amount shown on Form 1099-C as income. The amount, if any, you must report depends on all the facts and circumstances. Generally, however, unless you meet an exception or exclusion, you must report any taxable canceled debt reported on Form 1099-C as ordinary income on:

-          Form 1040 or Form 1040NR, if the debt is a nonbusiness debt;

-          Schedule C or Schedule C-EZ (Form 1040), if the debt is related to a nonfarm sole proprietorship;

-          Schedule E (Form 1040), if the debt is related to non-farm rental of real property;

-          Form 4835, 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), if the debt is farm debt and you are a farmer.

Tax Changes for 2017: A Check List

Welcome, 2017! As the New Year rolls around, you can bet your bottom dollar that there will be changes to current tax laws… and 2017 is no different.  From health savings accounts to tax rate schedules and standard deductions, American Tax Company has compiled a checklist of tax changes to help you plan the year ahead. 

Individuals

For 2017, more than 50 tax provisions are affected by inflation adjustments, including personal exemptions, AMT exemption amounts, and foreign earned income exclusion.  While the tax rate structure, which ranges from 10 to 39.6 percent, remains the same as in 2016, tax-bracket thresholds increase for each filing status. Standard deductions and the personal exemption have also been adjusted upward to reflect inflation.

Penalty for not Maintaining Minimum Essential Health Coverage

For calendar year 2017, the dollar amount used to determine the penalty for not maintaining minimum essential health coverage is $695.

Earned Income Tax Credit

For tax year 2017, the maximum earned income tax credit (EITC) for low and moderate income workers and working families rises to $6,318, up from $6,269 in 2016.  The credit varies by family size, filing status, and other factors, with the maximum credit going to join fliers with three or more qualifying children.

Child Tax Credit

For the tax year 2017, the child tax credit is $1,000 per child.  The enhanced child tax credit was made permanent this year by the Protecting Americans from Tax Hikes Act of 2016 (PATH).  In addition to a $1,000 credit per qualifying child, an additional refundable credit equal to 15 percent of earned income in excess of $3,000 has been available since 2009.

American Opportunity Tax Credit and Lifetime Learning Credits

The American Opportunity Tax Credit (formerly the Hope Scholarship Credit) was extended to the end of 2017 by ATRA but was made permanent by PATH in 2016.  The maximum credit is $2,500 per student.  The Lifetime Learning Credit remains at $2,000 per return; however, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $112,000, up from $111,000 for tax year 2016.

For more information on the above listed items or any other tax law changes, please contact our office to speak with one of our friendly and knowledgeable Tax Professionals.  

Help! I received a letter from the IRS

Each year the Internal Revenue Service mails millions of notices.  The topics of the letter varies from person to person, all based on your individual tax needs and requirements.  While the content will be different from another person, here are some tips for what you should do if you receive a notice from the Internal Revenue Service.

•     Don’t ignore it!  You can respond to most IRS notices quickly and easily.  And it’s important that you reply promptly.
•     IRS notices usually deal with a specific issue about your tax return or tax account.  For example, it may say the IRS has corrected an error on your tax return.  Or it may ask you for more information.
•     Read it carefully and follow the instructions about what you need to do.
•     If it states that the IRS corrected your tax return, review the information in the notice and compare it to your return.  If you agree, you do not need to reply unless a payment is due.

If you do not agree, it’s important that you respond to the IRS.  Write a letter that explains why you don’t agree.  Make sure to include information and any documents you want the IRS to consider.  Include the bottom tear-off portion of the notice.  Allow a minimum of 30 days for a response from the IRS.  Mail your reply to the IRS at the address shown in the lower left part of the notice.  Allow at least 30 days for a response from the IRS.  If you ever receive a notice that you’re unsure of the meaning, don’t hesitate to contact our office for assistance!  

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