tax Archives - Northern California Bankruptcy Lawyer

Got A 1099? How To Avoid Paying More Tax

One of life’s persistent gotcha’s is the tax consequence of having debt forgiven.

Did you compromise a debt, eliminate it upon foreclosure, or have your creditor simply wipe it out without payment. You may have a tax problem.

The tax code treats the forgiveness of debt as income, even though you never saw a penny of cash.

But there is hope (or a loophole, depending on your perspective).

Exceptions to canceled debt as income

Five exceptions will excuse you from paying taxes on canceled debt.

Insolvency is one.

If you are insolvent, the forgiven debt doesn’t get added to your taxable income.

Bankruptcy is the other big exception. Debt wiped out in bankruptcy does not get added to your taxable income.

The bankruptcy exception often makes bankruptcy superior to debt settlement, and sometimes is itself the driving reason to file a bankruptcy before a foreclosure.

Are you really insolvent

Like much of the tax code, it isn’t simple to know if you are insolvent for these purposes.

The huge difference between the IRS treatment of your net worth and the way we address insolvency in bankruptcy is that the IRS includes retirement assets in the solvency calculation.

The last time I wrote about cancellation of debt and the possible tax surprise on foreclosure or short sale, I couldn’t lay my hands on the form the IRS provides to calculate insolvency.

Found it!

IRS publication 4681 contains the worksheet along with an explanation of the application of the principal that, absent an exception, debt canceled without payment is just like cash in the bank for tax purposes.

So, if you got a form 1099 indicating your debt was canceled and it wasn’t a bankruptcy discharge that canceled it, get out the worksheet and see if you were insolvent when the debt was canceled.

If you were insolvent by the IRS reckoning, check the box on Form 982 and submit it with your return.

Five Tax Tips For Two Cents

By Cathy Moran

The tax filing deadline approaches.

So why is a bankruptcy lawyer talking about taxes?

I’ve found over three decades as a bankruptcy lawyer that there’s a surprising degree of overlap between bankruptcy and tax .

All too often, it’s tax troubles that brings a family to me for help.

Here’s my two cents on what I know about taxes. It’s not a lot, but what I know is both simple and critical.

File those tax returns

Lots of folks who end up in my office discussing bankruptcy held off filing their returns because they figured they couldn’t pay the tax that would be due.

Bad decision.

Without a return, taxes never die

The IRS will not descend on you the week after you file a return with tax due but no check. They’re still opening envelops.

But filing a return gets all kinds of time periods running that may benefit you: the 3 years til the taxes are dischargeable in bankruptcy; the 10 years til the tax collection statute runs.

Whatever you do, don’t let the IRS file a tax return for you.

Don’t pay tax on discharged debt

If your debts were discharged in bankruptcy last year, that discharge has no tax consequences.

The Internal Revenue Code specifically excludes from taxable income any debts forgiven in bankruptcy.

Cancellation of debt is tax free

You may get a 1099 reporting the cancelled debt. The creditor whose debt is forgiven is required to do so.

It’s up to you to assert that there’s an exception to tax. And there’s an IRS form to rebut any tax consequences. Get it and file it.

Claim deductions for Chapter 13 payments

If you’re in a Chapter 13 that catches up arrearages on real property loans, claim those payments as deductions of your own. Just because the trustee writes the check, it’s still you paying the mortgage interest in that payment.

How to find and claim the deduction

The concept here goes beyond mortgage interest. If the expense was deductible had you written the check, it’s deductible if the trustee pays it.

Get the trustee’s disbursement records in your case from the trustee’s web site and get to deducting.

If you owe tax, fix your withholding

The return to be filed this spring can tell you if you are withholding enough money to pay your taxes.

If there’s a big number on the bottom line of the return for last year, and this year looks similar, increase your withholding now.

What Goldilocks knew about taxes

And if you think you can’t pay taxes as you go and support the rest of your living expenses, you need to look hard at the big picture.

It’s generally a poor decision to short the feds so you can pay AmEx or Visa.

Amend old returns if you missed something

If you missed a deduction or otherwise overpaid your taxes in a previous year, you have only three years to amend that return and claim a refund.

Time running out to claim prior year tax breaks

Lower income families often miss the fact that they get a tax credit (that’s real money, not just a deduction) under the Earned Income Tax Credit. Find out if you are eligible.

Discharging taxes in bankruptcy

The tax filing extension can be dangerous

Wiping out tax liens

Double Dipping On Retirement Savings

By Cathy Moran

Any time you can double your savings and protect your money from creditors is a good time of the year.

The period between New Years and Tax Day is my favorite time of the year, just for that reason.

You can make contributions to your IRA last year AND contribute to this year’s IRA allowance.

You get a scoop of last year’s tax benefits, topped with a scoop of this year’s tax break.

You don’t have to be filing bankruptcy for this to be important. But, this trick is a favorite of mine when I have my bankruptcy-lawyer hat on.

IRAs in bankruptcy

My goal is to maximize the value a bankruptcy client can keep through the case.

Everyone in bankruptcy can protect over a million dollars in IRA savings. Not that I’ve seen an IRA anywhere near that number. But Congress says IRA savings are a good thing, and beyond the reach of your creditors.

And I’ve never faced challenge from a bankruptcy trustee when a client contributed the maximum allowed by tax law to a retirement account, even if they sold other assets to make the contribution.

IRAs for all

Tax advantaged retirement plans are grounded in federal tax law and are available to the solvent as well as the insolvent.

IRA’s are asset protection on the cheap

Too many Americans seem to want to live in a little bubble that tells us that old age will work out OK, (somehow) whether we take responsibility for making it happen or not.

That’s magical thinking at its worst.

Unless you expect to inherit a fortune, you need to take steps now so that you are financially independent then.

Tax break opportunity is fleeting

Old age is inevitable and the tax code has an annual limit for how much you can contribute to a retirement vehicle to grow tax free. If you don’t make a contribution equal to the limit for last year, that unused tax break is lost forever.

Between now and April 15th, take two scoops of retirement savings. Or seed your retirement account with any tax refund from this year.