In the wake of the recent economic and housing crisis, many taxpayers have found themselves forced to renegotiate or abandon their mortgage debt obligations.  The good news is that if your mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income. Here are 10 important tax facts you should know about Mortgage Debt Forgiveness.

1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
2. The limit is $1 million for a married person filing a separate return.
3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
6. Proceeds of refinanced debt used for other purposes—for example, to pay off credit card debt—do not qualify for the exclusion.
7. If you qualify, you can claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions—such as insolvency—may be applicable. IRS Form 982 provides more details about these provisions.
9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.

For more information about the Mortgage Forgiveness Debt Relief Act of 2007, consult your professional tax professional or tax preparer, or visit the official IRS website at www.IRS.gov. Another good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. Taxpayers may obtain a copy of this publication and Form 982 either by downloading them from IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Perhaps one of the most confusing things for individual tax filers to deal with each year at tax filing time is the Alternative Minimum Tax, or AMT.  In the most simple terms, the AMT is an alternate tax that was implemented over four decades ago to ensure that high-earning individuals who benefit from certain tax advantages still pay at least some minimum amount of tax.

Originally, the AMT was intended to mostly affect high income individuals who were able to substantially or completely reduce their income taxes through legitimate tax deductions and credits.  However, because the AMT is not indexed to account for inflation, the AMT now impacts millions more taxpayers than likely ever was contemplated when the law originally was enacted.

Many commentators and tax critics—including many politicians—have decried the AMT as onerous and over-reaching in terms of the number of taxpayers which the law now impacts, especially the number of middle-income taxpayers which are affected.  Congress has introduced numerous proposals for legislation to overhaul the AMT in recent years, but no major revisions to the law have been passed.  Thus, unless and until Congress changes the law, the AMT is a part of the Tax Code and taxpayers should understand its impact.

Here are some facts to know about the AMT and changes to this special tax for 2009:

1. Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses. These benefits can drastically reduce some taxpayers’ tax obligations. Congress created the AMT in 1969, targeting taxpayers who could claim so many deductions that they owed little or no income tax. (Under the AMT, many deductions and credits available to reduce ordinary income tax are not available to reduce the AMT.)

2. Since the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.

3. You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount.

4. The AMT exemption amounts are set by law for each filing status.

5. For tax year 2009, Congress raised the AMT exemption amounts to the following levels:

• $70,950 for a married couple filing a joint return and qualifying widows and widowers;
• $46,700 for singles and heads of household;
• $35,475 for a married person filing separately.

6. The minimum AMT exemption amount for a child whose unearned income is taxed at the parents’ tax rate has increased to $6,700 for 2009.

7. If you claim a regular tax deduction on your 2009 tax return for any state or local sales or excise tax on the purchase of a new motor vehicle, that tax also is allowed as a deduction for the AMT.

The IRS has made available on its website an electronic version of what it calls the AMT Assistant for Individuals to help individual taxpayers determine whether they may be subject to the AMT. (The AMT Assistant is an electronic version of the AMT Worksheet found in the Instructions to IRS Form 1040, called the “Worksheet to See if You Should Fill in Form 6251 – Line 45.”)  The AMT Assistant is intended to provide a simple test for taxpayers who fill out their tax returns without using software to determine whether they may be subject to the AMT.

For further information, or for additional help to determine if and how the AMT impacts your individual tax filing, consult your professional tax advisor or tax preparer, or visit the IRS web site at IRS.gov.

Most businesses now may use losses incurred during the recent economic downturn to reduce income from prior tax years, under an IRS revenue procedure issued in late 2009 which implements relief provided by the Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA). The relief provided under the WHBAA differs from similar relief issued earlier in 2009 under The American Recovery and Reinvestment Act (ARRA) in that the previous relief was limited to small businesses. (See link, Questions and Answers on WHBAA NOL provisions.) The current relief is applicable to any taxpayer with business losses, except those that received payments under the Troubled Asset Relief Program (TARP). The relief also applies to a loss from operations of a life insurance company.

Taxpayers under the revenue procedure may elect to carry back a net operating loss (NOL) for a period of three, four or five years, or a loss from operations for four or five years, to offset taxable income in those preceding taxable years. An NOL or loss from operations carried back five years may offset no more than 50 percent of a taxpayer’s taxable income in that fifth preceding year. This limitation does not apply to the fourth or third preceding year.

The revenue procedure applies to taxpayers that incurred an NOL or a loss from operations for a taxable year ending after Dec. 31, 2007, and beginning before Jan. 1, 2010.  For more information, consult your professional tax advisor or tax preparer.

For most people, taxes simply are a part of life. Many even would say that taxes are the price for living in a free and democratic society. Nevertheless, some people argue that taxes are illegal or illegitimate, or that there are legal ways to avoid paying any taxes at all. Federal tax laws do provide numerous means to legitimately reduce or avoid taxes, and taxpayers are entitled to structure their affairs to legitimately maximize the reduction or avoidance of taxes within those laws. However, with the proliferation of illegitimate promoters selling illegal tax evasion schemes, as well as the increase of tax protesters advancing bogus or confusing arguments for the complete evasion of taxes, taxpayers do need to separate truth from fiction (or unsubstantiated opinion).

On February 5, 2010, the Internal Revenue Service released the 2010 version of its discussion and rebuttal of many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws. The IRS advises anyone who contemplates arguing on legal grounds against paying their fair share of taxes to first read the 80-plus page document, The Truth About Frivolous Tax Arguments, available on the IRS website at IRS.gov.  The document explains many of the most common frivolous arguments made in recent years and it describes the legal responses that have refuted these claims. The IRS has compiled these arguments in one document because it believes this will help taxpayers avoid wasting their time and money with frivolous arguments and incurring penalties.

Congress in 2006 increased the amount of the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position which the IRS identifies or has identified as frivolous.  The IRS highlighted in the document about 40 new cases adjudicated in 2009. Highlights include cases involving injunctions against preparers and promoters of Form 1099-Original Issue Discount schemes and injunctions against preparers and promoters of false fuel tax credit schemes.

If you have any questions about the legitimacy of a particular tax benefit or about a tax avoidance method you have heard promoted, consult a reputable tax professional for further information.

If you are donating to charities providing earthquake relief in Haiti, you may be able to claim those donations on your 2009 income tax return.  (See earlier article.)  Here are 10 important facts to know about this special provision.

For more information see IRS Publication 526, Charitable Contributions and Publication 3833 , Disaster Relief: Providing Assistance through Charitable Organizations.  Otherwise, consult your professional tax advisor or tax preparer.  To determine if an organization is a qualified charity, visit “Search for Charities” at IRS.gov. Note that some organizations, such as churches or governments, may be qualified even though they are not listed on IRS.gov.

As anyone paying for college knows, the costs associated with higher education can be very expensive. To help students and their parents, federal tax law offers several benefits in the form of credits and deductions to offset education costs. Following are five helpful tax benefits available to offset those costs:

1. The American Opportunity Credit.  This credit can help parents and students pay part of the cost of the first four years of college. The American Recovery and Reinvestment Act modifies the existing Hope Credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Eligible taxpayers may qualify for the maximum annual credit of $2,500 per student. Generally, 40 percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.
2. The Hope Credit.  This credit can help students and parents pay part of the cost of the first two years of college. This credit generally applies to 2008 and earlier tax years. However, for tax year 2009, a special expanded Hope Credit of up to $3,600 may be claimed for a student attending college in a Midwestern disaster area as long as the eligible taxpayer does not also claim an American Opportunity Tax Credit for any other student in 2009.
3. The Lifetime Learning Credit.  This credit can help pay for undergraduate, graduate and professional degree courses—including courses to improve job skills—regardless of the number of years in the program.  Eligible taxpayers may qualify for up to $2,000—$4,000 if a student is in a Midwestern disaster area—per tax return.
4. Enhanced benefits for 529 college savings plans.  Certain computer technology purchases are now added to the list of college expenses that can be paid for by a qualified tuition program, commonly referred to as a “529 plan.”  For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services.
5. Tuition and fees deduction.  Students and their parents may be able to deduct qualified college tuition and related expenses of up to $4,000. This deduction is an adjustment to income, which means the deduction will reduce the amount of an eligible taxpayer’s income subject to tax. The Tuition and Fees Deduction may be beneficial to you if you do not qualify for the American opportunity, Hope, or lifetime learning credits.

Note that a taxpayer cannot claim the American Opportunity and the Hope and Lifetime Learning Credits for the same student in the same year. A taxpayer also cannot claim any of the credits if he or she claims a tuition and fees deduction for the same student in the same year. To qualify for an education credit, a taxpayer must pay post-secondary tuition and certain related expenses for himself or herself, for his or her spouse, or for his or her dependent. The credit may be claimed by the parent or the student, but not by both. Students who are claimed as a dependent cannot claim the credit.

For more information, consult your professional tax advisor or tax preparer, or see Publication 970, Tax Benefits for Education, which can be obtained online at IRS.gov.  Also, for a brief IRS YouTube video on the topic, see the following link:  Education Credits (English/ASL) (Spanish)

Tax Credit in General

For first-time homebuyers, there is a refundable credit equal to 10 percent of the purchase price of a home up to a maximum of $8,000 ($4,000 if married filing separately). A first-time homebuyer is an individual who, with his or her spouse if married, has not owned any other principal residence for three years prior to the date of the purchase of the new principal residence for which the credit is being claimed.

Situations in which a taxpayer cannot claim the credit

There are several situations in which a taxpayer cannot claim the first-time homebuyer credit:

• The taxpayer is a nonresident alien;
• The taxpayer purchases a home located outside the United States;
• The taxpayer sells the home or if it stops being the taxpayer’s principal residence in the year the taxpayer purchased the home;
• The taxpayer receives the home, or any portion of the home, as a gift or as an inheritance; and
• The taxpayer exceeds the income limits.

The Worker, Homeownership, and Business Assistance Act of 2009 extended and expanded the tax credit that initially had been created in 2008 for first-time homebuyers. The new law extends the deadline for qualifying home purchases from Nov. 30, 2009, to April 30, 2010. If a buyer enters into a binding contract by April 30, 2010, the buyer has until June 30, 2010, to settle on the purchase.

Exception for Members of the Armed Forces.  Members of the Armed Forces and certain federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and still qualify for the credit. An eligible taxpayer must buy or enter into a binding contract to buy a home by April 30, 2011, and settle on the purchase by June 30, 2011.

Purchases made after Nov. 6, 2009

Taxpayers should be aware of some changes to the law that apply to home purchases after Nov. 6, 2009, the date of enactment of the new law.  The new law expands the tax credit to include not just first-time homebuyers, but also long-time residents who buy a new principal residence. They are eligible for a credit of 10 percent of the purchase price up to a maximum credit of $6,500. A long-time resident is an individual who, with his or her spouse if married, has owned and used the same home as a principal residence for any period of 5 consecutive years during the 8-year period ending on the date of purchase of the new principal residence for which the credit is being claimed.

Income Limitation

For people who purchase homes after Nov. 6, 2009, the full credit will be available to taxpayers with a modified adjusted gross income (MAGI) up to $125,000, or $225,000 for joint filers. MAGI is your adjusted gross income plus the total of certain foreign earned income. Those with MAGI between $125,000 and $145,000, or $225,000 and $245,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

However, for homes purchased before Nov. 7, 2009, existing income limits remain in place. The full credit is available to taxpayers with MAGI up to $75,000, or $150,000 for joint filers. Those with MAGI between $75,000 and $95,000, or $150,000 and $170,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

Restrictions applicable to purchases after Nov. 6, 2009

Several new restrictions apply to purchases that occur after Nov. 6, 2009:

• Dependents are not eligible to claim the credit;
• No credit is available if the purchase price of a home is more than $800,000; and
• A purchaser must be at least 18 years of age on the date of purchase.

Credit Claimed on a 2009 or 2010 Tax Return

For all qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 individual income tax returns.

A new version of Form 5405, First-Time Homebuyer Credit, (and instructions) became available on Jan. 15, 2010, for taxpayers who purchased a home after Nov. 6, 2009.  The IRS advises that this new version of the form must be used to claim the credit. Likewise, taxpayers claiming the credit on their 2009 returns, no matter when the house was purchased, also must use the new version of Form 5405. According to the IRS (as announced in January, 2010), taxpayers who claim the credit on their 2009 income tax return will not be able to file an electronic return, but instead will need to file a paper return.

Credit Claimed on a 2008 Tax Return

The maximum credit originally was $7,500 ($3,750 if married filing separately). According to the IRS, a taxpayer who chose to claim the credit on their 2008 income tax return for a home purchased in 2009 and who also did not use the February 2009 revision of Form 5405, now may be able to claim the additional $500 on an amended 2008 tax return. Taxpayers should consult their professional tax advisor or tax preparer for more information.

Selling the Home and Other Events that Require Repaying the Credit

Taxpayers who bought homes in 2009 or 2010 and sold them within a 36-month period that begins on the purchase date, must repay the credit. They also must repay the credit if they convert the home to a business or rental property or the lender forecloses on the home. The taxpayer repays the credit by including the amount of the credit as additional tax on the tax return for the year in which the repayment event occurs.

However, taxpayers do not have to repay all or a portion of the credit under the following circumstances:

• If taxpayers sell the home to someone who is not related to them, the repayment in the year of sale is limited to the amount of gain on the sale;
• If the home is destroyed, condemned, or disposed of under threat of condemnation and the taxpayer acquires a new principal residence within 2 years of the event, the taxpayer does not have to repay the credit; and
• If, as part of a divorce settlement, the home is transferred to a spouse or former spouse, the spouse who receives the home is responsible for repaying the credit if required.

For more information or to determine your eligibility for the first-time homebuyer credit, consult your professional tax advisor or tax preparer, and see the additional information avaialble on the official IRS website at IRS.gov.

Like many other governmental organizations and corporate entities, the IRS utilizes modern technology in an attempt to reach taxpayers and other individuals to inform them about recent and relevant tax issues. One of these forms of technology is the phenomenon of posting videos on YouTube.com. The videos are cleanly produced and generally provide helpful tax information; however, the videos generally are short and thus not in-depth, so the content of the videos should be considered accordingly.  Taxpayers should consult their professional tax advisor or tax preparer for more detailed information about any of these topics, or visit the official IRS website at IRS.gov.

Below are links to some of the recent YouTube videos as posted by the IRS, most of which are available in both English and Spanish languages, as well as in American Sign Language (ASL).

IRS YouTube Videos:

• Tax Filing Season 2010   English | Spanish | ASL
• Earned Income Tax Credit   English | Spanish | ASL
• Education Credits – Parents    English| ASL
• Education Tax Credit-Claim it-Students     English | Spanish | ASL 
• Energy Tax Credits Claim It     English | Spanish | ASL 
• Haiti Earthquake Donations     English | Spanish | ASL 
• Making Work Pay – Claim It     English | ASL 
• New Homebuyer Credit-Claim It     English | Spanish
• New Homebuyer Credit-Military     English 
• Split Refunds-Savings Bonds     English | Spanish
• Unemployment Compensation     English | Spanish
• Vehicle Tax Deduction – Claim It     English | Spanish | ASL   

As taxpayers get ready to prepare their 2009 individual income tax returns, the Internal Revenue Service wants to advise them about tax law changes that may impact their tax returns.  Here are five notable changes that may show up on your 2009 individual income tax return:

1. The American Recovery and Reinvestment Act (ARRA)

The ARRA provides several tax provisions that affect tax year 2009 individual income tax returns due April 15, 2010. The recovery law provides tax incentives for first-time home buyers, people who purchased new cars, those that made their homes more energy efficient, parents and students paying for college, and people who received unemployment compensation.

2. Expanded IRA Deduction

You may be able to take an IRA deduction if you were covered by a retirement plan and your 2009 modified adjusted gross income was less than $65,000, or $109,000 if you are married filing a joint return.

3. Standard Deduction Increased for Most Taxpayers

The 2009 basic standard deductions all increased. They are:

• $11,400 for married couples filing a joint return and qualifying widows and widowers
• $5,700 for singles and married individuals filing separate returns
• $8,350 for heads of household

Taxpayers can now claim an additional standard deduction based on the state or local sales or excise taxes (as applicable) paid on the purchase of most new motor vehicles purchased after February 16, 2009. You can also increase your standard deduction by the state or local real estate taxes paid during the year or net disaster losses suffered from a federally declared disaster.

4. 2009 Standard Mileage Rates

The standard mileage rates changed for 2009. The standard mileage rates for business use of a vehicle:

• 55 cents per mile

The standard mileage rates for the cost of operating a vehicle for medical reasons or a deductible move:

• 24 cents per mile

The standard mileage rate for using a car to provide services to charitable organizations remains at 14 cents per mile.

5. Kiddie Tax Change

The amount of taxable investment income a child can have without it being subject to tax at the parent’s rate has increased to $1,900 for 2009.

For more information about these and other changes for tax year 2009, consult your professional tax advisor or tax preparer, or see Fact Sheet 2010-4 on the official IRS website at IRS.gov. 

Certain government retirees who received a government pension or annuity payment in 2009 may be eligible for the Government Retiree Credit. The American Recovery and Reinvestment Act of 2009 provided this one-time credit of $250 for certain federal and state pensioners.

Here are seven things the IRS recently advised about the Government Retiree Credit:

1. You can take this credit if you receive a pension or annuity payment in 2009 for service performed for the U.S. Government or any U.S. state or local government and the service was not covered by social security.
2. Recipients of the Making Work Pay Credit will have that credit reduced by any Government Retiree Credit they receive.
3. The credit is $250 for individuals and $500 if married filing jointly and both you and your spouse receive a qualifying pension or annuity.
4. You must have a valid social security number to claim the credit. If married filing jointly, both spouses must have a valid social security number to each claim the $250 credit.
5. You cannot take the credit if you received a $250 economic recovery payment in 2009.
6. This is a refundable credit, which means it may give you a refund even if you had no tax withheld from your pension.
7. To claim the credit, you must complete Schedule M, Making Work Pay and Government Retiree Credits, and attach it to your Form 1040A or 1040.

For information about eligibility for the credit, consult your professional tax advisor or tax preparer.