If you have any type of financial difficulty, keep in mind that there’s a tax impact to events such as job loss or foreclosure. Such consequences may not necessarily be predominantly negative. For example, if your income decreased, you may be newly eligible for the Earned Income Tax Credit or other tax credits, which is a good thing.
Of the utmost importance when facing some financial obstacle is to contact the IRS immediately if you believe that you may have trouble paying your tax bill. Please see our blog You Can’t Pay Your Tax Bill in Full You Have Options…An experienced and knowledgeable tax attorney may help ease any financial burden. Remember that to avoid additional penalties, you also should always file a tax return even if you are unable to pay.
Here are some “what if” scenarios and the possible tax impact:
Debt Related
What if I lose my home through foreclosure?
Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may generally exclude income from the discharge of debt on their principal residence or mortgage re-modification. Of course, this exclusion does not apply to second residences or vacation homes.
What if I sell my home for a loss?
Losses from the sale of personal–use property, such as a home or automobile, are not deductible. This loss is also not eligible for the annual capital gains loss of up to $3,000.
What if my debt is forgiven?
The tax impact of debt forgiveness or cancellation depends on the individual facts of each case. Generally, lenders are required in most cases to report the amount of the canceled debt to both the taxpayer and the IRS. One of several exceptions to the taxability of cancelled debt is bankruptcy.
What if I am insolvent?
Taxpayers are insolvent when their total liabilities exceed total assets. Forgiven debt may be excluded as income under the “insolvency” exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent.
What if I file for bankruptcy protection?
Debts discharged through bankruptcy are not considered taxable income. However, some tax debts are not dischargeable in a bankruptcy action. Debt canceled in a chapter 11 bankruptcy case isn’t included in income.
If you are struggling through a significant and economically debilitating life event, and have questions or concerns about filing and paying your taxes in this situation, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
