IRS Debt Forgiveness
Taking into consideration the recent economic recession, the administration has made some vital reforms to the federal tax tables. These reforms, also known as the IRS debt forgiveness act, were made to provide some relief to tax payers who were already facing the full brunt of the economic downturn. The government enacted the mortgage forgiveness debt relief act to help homeowners by offering tax relief on forgiven mortgage loans.
The IRS debt forgiveness program also offers some respite to people facing home foreclosures and those with farm loans. One provision in the Internal Revenue Service (IRS) regulation also provides tax relief on non-recourse loans. People filing for chapter 7 bankruptcy are also eligible for debt forgiveness. Tax exemption is offered in rare cases and it is a complicated process.
IRS Debt Relief
Debt settlement has become a common practice in the US today with banks and lending organizations having a department dedicated to it. The recent economic recession, which led to pay cuts and job losses, has contributed to the hike in such cases. In most regions across America, there is taxation, when a debt is settled it is considered to be an income by the IRS and is hence taxed. For example, if you have an outstanding debt of USD 10,000 and the lender forgives USD 6,000 then the IRS will consider USD 6,000 as your income and levy tax on this amount.
The IRS debt forgiveness program offers relief to citizens by forgiving the tax on any such settlement. However, these tax exemptions are limited to only certain kind of settlements or total debt forgiveness. You are eligible for tax-exempts if your arrears have been wiped out due to filing of chapter 7 bankruptcy. Tax can also be forgiven if the net value of your assets is substantially less than your accumulative debt. The mortgage act provides relief on arrears forgiven up to 2 million dollars on the primary residence.
The administration has also made vital changes to the federal tax deduction tables enabling working individuals to be eligible for federal income tax credit. The Earned Income Tax Credit (EITC) allows people with low or moderate-income to file for tax credit. This way, working individuals can clear a part of or full tax debt and some individuals may be eligible for a refund if the amount they owe is less than the EITC.
Mortgage Debt Forgiveness Act
One of the laws passed by the US congress that contributes towards the IRS debt forgiveness program is the mortgage forgiveness debt relief act. Under this act, homeowners who have had their arrears forgiven by the lender will not be taxed. It does not matter if the full amount or a part of it is forgiven the IRS will not levy tax.
To qualify for this, the loan should have been used to buy or build a primary residence. The tax exempt also applies if you have used the debt to carry out substantial repairs to your primary residence and if it is secured by that residence.
Up to 2 million dollars worth of forgiven debt is tax exempt. Anything above that is taxable. For example, if you have arrears of 3 million dollars on your primary residence and the lender decides to waive off 2 million dollars, this amount will be tax-free. Arrears forgiven due to home foreclosure are not taxable along with arrears forgiven due to mortgage restructuring.
The IRS debt forgiveness act does not include forgiven credit card or car loan debt, unless the individual has filed for bankruptcy. These changes in the federal tax system have been welcomed by many analysts, however they feel that more needs to be done by the government to help the population in the prevailing economic situation.