Your Enrolled Agent Course Makes You the Ideal Adviser for Taxpayers With Debt Cancellation
There are a lot of taxpayers recently receiving notices about forgiven debt. And the trend has no signs of ending soon. Financial institutions use Form 1099-C to identify any debt cancellation exceeding $600. This often causes taxpayer panic because the form is a report of taxable income. But there are some ways to exclude forgiven debt from income. Therefore, reaching out to these individuals with the skills you possess from passing the enrolled agent exam is helpful to them and beneficial to building your tax practice.
Any amount of cancelled debt is normally taxable income. This includes any loan balance that’s forgiven by a lender following property foreclosure, repossession, or voluntary return. However, legislation in recent years has provided some relief for taxpayers with cancellation of loans in certain categories.
Most significant is the exclusion from income of forgiven debt on a principal residence. This law expires at the end of 2012. So an enrolled agent course on this subject provides important details to master now. To qualify for this exclusion from owing tax on forgiven debt, the loan must have been obtained to buy, build, or substantially improve a principal residence.
The maximum amount of excludable cancelled debt on a principal residence is $2,000,000. That’s reduced to $1,000,000 for someone who is married filing separately. The forgiven debt excluded from tax must be secured by the primary residence and directly related to a decline in the home’s value. Your enrolled agent continuing education covers the process for identifying this exclusion from income. You need to gather the home’s fair market value upon debt forgiveness and the taxpayer’s basis.
An important factor you’ll find in tax CPE on this subject is the information to gather regarding the reason for incurring the debt. To exclude cancelled debt secured by a principal residence requires that the loan proceeds were not used for purposes unrelated to the house, such as home equity borrowing to pay off credit cards.
The act covering forgiven debt on a principal residence doesn’t include second homes or vacation properties. However, there are other tax law provisions that can provide relief for taxpayers with cancelled debt related to qualified business real estate or farm indebtedness. Student loan cancellation is also eligible for exclusion from taxable income.
Debt for any purpose that’s forgiven of insolvent taxpayers is excluded from taxable income. Proving insolvency is a most important matter where your enrolled agent knowledge helps taxpayers with forgiven debt. This is accomplished by completing Form 982 indicating taxpayer assets and liabilities at the time of debt cancellation.
The rise in number of taxpayers with cancelled debt represents a big market for your enrolled agent abilities. People in these situations deserve to know about the high level of expertise provided by enrolled agents.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.