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2012 Income Tax Return

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2012 Income Tax Return

2012 income tax return 1. 2012 income tax return   Canceled Debts Table of Contents General RulesForm 1099-C Discounts and loan modifications Sales or other dispositions (such as foreclosures and repossessions) Abandonments Stockholder debt This chapter discusses the tax treatment of canceled debts. 2012 income tax return General Rules Generally, if a debt for which you are personally liable is forgiven or discharged for less than the full amount owed, the debt is considered canceled in whatever amount it remained unpaid. 2012 income tax return There are exceptions to this rule, discussed under Exceptions , later. 2012 income tax return Generally, you must include the canceled debt in your income. 2012 income tax return However, you may be able to exclude the canceled debt. 2012 income tax return See Exclusions , later. 2012 income tax return Example. 2012 income tax return John owed $1,000 to Mary. 2012 income tax return Mary agreed to accept and John paid $400 in satisfaction of the entire debt. 2012 income tax return John has canceled debt of $600. 2012 income tax return Example. 2012 income tax return Margaret owed $1,000 to Henry. 2012 income tax return Henry and Margaret agreed that Margaret would provide Henry with services (instead of money) in full satisfaction of the debt. 2012 income tax return Margaret does not have canceled debt. 2012 income tax return Instead, she has income from services. 2012 income tax return A debt includes any indebtedness: For which you are liable, or Subject to which you hold property. 2012 income tax return Debt for which you are personally liable is recourse debt. 2012 income tax return All other debt is nonrecourse debt. 2012 income tax return If you are not personally liable for the debt, you do not have ordinary income from the cancellation of debt unless you retain the collateral and either: The lender offers a discount for the early payment of the debt, or The lender agrees to a loan modification that results in the reduction of the principal balance of the debt. 2012 income tax return See Discounts and loan modifications , later. 2012 income tax return However, upon the disposition of the property securing a nonrecourse debt, the amount realized includes the entire unpaid amount of the debt, not just the FMV of the property. 2012 income tax return As a result, you may realize a gain or loss if the outstanding debt immediately before the disposition is more or less than your adjusted basis in the property. 2012 income tax return For more details on figuring your gain or loss, see chapter 2 of this publication or see Publication 544. 2012 income tax return There are several exceptions and exclusions that may result in part or all of a canceled debt being nontaxable. 2012 income tax return See Exceptions and Exclusions, later. 2012 income tax return You must report any taxable canceled debt as ordinary income on: Form 1040 or Form 1040NR, line 21, if the debt is a nonbusiness debt; Schedule C (Form 1040), line 6 (or Schedule C-EZ (Form 1040), line 1), if the debt is related to a nonfarm sole proprietorship; Schedule E (Form 1040), line 3, if the debt is related to nonfarm rental of real property; Form 4835, line 6, if the debt is related to a farm rental activity for which you use Form 4835 to report farm rental income based on crops or livestock produced by a tenant; or Schedule F (Form 1040), line 8, if the debt is farm debt and you are a farmer. 2012 income tax return Form 1099-C If you receive a Form 1099-C, that means an applicable entity has reported an identifiable event to the IRS regarding a debt you owe. 2012 income tax return The identifiable event may be an actual cancellation of the debt or it may be an event the applicable entity is required, solely for purposes of reporting to the IRS, to treat as a cancellation of debt. 2012 income tax return For information on the reasons an applicable entity files Form 1099-C, see Identifiable event codes, later. 2012 income tax return Unless you meet one of the exceptions or exclusions discussed later, this canceled debt is ordinary income and must be reported on the appropriate form discussed above. 2012 income tax return An applicable entity includes: A federal government agency, A financial institution, A credit union, and Any organization a significant trade or business of which is lending money. 2012 income tax return Identifiable event codes. 2012 income tax return    Box 6 of Form 1099-C should indicate the reason the creditor filed this form. 2012 income tax return The codes shown in box 6 are explained below. 2012 income tax return Also see the chart after the explanation for a quick reference guide for the codes used in Box 6. 2012 income tax return Note. 2012 income tax return Codes A through G and I identify specific occurrences resulting from an actual discharge of indebtedness. 2012 income tax return However, Code H, Expiration of nonpayment testing period, does not necessarily identify an actual discharge of indebtedness. 2012 income tax return Code A — Bankruptcy. 2012 income tax return Code A is used to identify cancellation of debt as a result of a title 11 bankruptcy case. 2012 income tax return See Bankruptcy , later. 2012 income tax return Code B — Other judicial debt relief. 2012 income tax return Code B is used to identify cancellation of debt as a result of a receivership, foreclosure, or similar federal or state court proceeding other than bankruptcy. 2012 income tax return Code C — Statute of limitations or expiration of deficiency period. 2012 income tax return Code C is used to identify cancellation of debt either when the statute of limitations for collecting the debt expires or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. 2012 income tax return In the case of the expiration of a statute of limitations, an identifiable event occurs only if and when your affirmative defense of the statute of limitations is upheld in a final judgment or decision in a judicial proceeding, and the period for appealing the judgment or decision has expired. 2012 income tax return Code D — Foreclosure election. 2012 income tax return Code D is used to identify cancellation of debt when the creditor elects foreclosure remedies that statutorily end or bar the creditor's right to pursue collection of the debt. 2012 income tax return This event applies to a mortgage lender or holder who is barred from pursuing debt collection after a power of sale in the mortgage or deed of trust is exercised. 2012 income tax return Code E — Debt relief from probate or similar proceeding. 2012 income tax return Code E is used to identify cancellation of debt as a result of a probate court or similar legal proceeding. 2012 income tax return Code F — By agreement. 2012 income tax return Code F is used to identify cancellation of debt as a result of an agreement between the creditor and the debtor to cancel the debt at less than full consideration. 2012 income tax return Code G — Decision or policy to discontinue collection. 2012 income tax return Code G is used to identify cancellation of debt as a result of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. 2012 income tax return For purposes of this identifiable event, a defined policy includes both a written policy and the creditor's established business practice. 2012 income tax return Code H — Expiration of nonpayment testing period. 2012 income tax return Code H is used to indicate that the creditor has not received a payment on the debt during a testing period ending on December 31, 2013. 2012 income tax return The testing period is a 36-month period increased by the number of months the creditor was prevented from engaging in collection activity by a stay in bankruptcy or similar bar under state or local law. 2012 income tax return This identifiable event applies only for a creditor that is a financial institution or credit union (and certain of their subsidiaries), the Federal Deposit Insurance Corporation (FDIC), Resolution Trust Corporation (RTC), National Credit Union Administration (NCUA), and other Federal executive agencies. 2012 income tax return Expiration of the nonpayment testing period does not necessarily result from an actual discharge of indebtedness. 2012 income tax return Code I — Other actual discharge before identifiable event. 2012 income tax return Code I is used to identify an actual cancellation of debt that occurs before any of the identifiable events described in codes A through H. 2012 income tax return Form 1099-C Reference Guide for Box 6 Identifiable Event Codes A Bankruptcy B Other judicial debt relief C Statute of limitations or expiration of deficiency period D Foreclosure election E Debt relief from probate or similar proceeding F By agreement G Decision or policy to discontinue collection H Expiration of nonpayment testing period I Other actual discharge before identifiable event Even if you did not receive a Form 1099-C, you must report canceled debt as gross income on your tax return unless one of the exceptions or exclusions described later applies. 2012 income tax return Amount of canceled debt. 2012 income tax return    The amount in box 2 of Form 1099-C may represent some or all of the debt that has been canceled or treated as canceled. 2012 income tax return The amount in box 2 will include principal and may include interest and other nonprincipal amounts (such as fees or penalties). 2012 income tax return Unless you meet one of the exceptions or exclusions discussed later, the amount of the debt that has been canceled is ordinary income and must be reported on the appropriate form as discussed earlier. 2012 income tax return Interest included in canceled debt. 2012 income tax return    If any interest is included in the amount of canceled debt in box 2, it will be shown in box 3. 2012 income tax return Whether the interest portion of the canceled debt must be included in your income depends on whether the interest would be deductible if you paid it. 2012 income tax return See Deductible Debt under Exceptions, later. 2012 income tax return Persons who each receive a Form 1099-C showing the full amount of debt. 2012 income tax return    If you and another person were jointly and severally liable for a canceled debt, each of you may get a Form 1099-C showing the entire amount of the canceled debt. 2012 income tax return However, you may not have to report that entire amount as income. 2012 income tax return The amount, if any, you must report depends on all the facts and circumstances, including: State law, The amount of debt proceeds each person received, How much of any interest deduction from the debt was claimed by each person, How much of the basis of any co-owned property bought with the debt proceeds was allocated to each co-owner, and Whether the canceled debt qualifies for any of the exceptions or exclusions described in this publication. 2012 income tax return See Example 3 under Insolvency, later. 2012 income tax return Discounts and loan modifications If a lender discounts (reduces) the principal balance of a loan because you pay it off early, or agrees to a loan modification (a “workout”) that includes a reduction in the principal balance of a loan, the amount of the discount or the amount of principal reduction is canceled debt. 2012 income tax return However, if the debt is nonrecourse and you did not retain the collateral, you do not have cancellation of the debt income. 2012 income tax return The amount of the canceled debt must be included in income unless one of the exceptions or exclusions described later applies. 2012 income tax return For more details, see Exceptions and Exclusions, later. 2012 income tax return Sales or other dispositions (such as foreclosures and repossessions) Recourse debt. 2012 income tax return   If you owned property that was subject to a recourse debt in excess of the FMV of the property, the lender's foreclosure or repossession of the property is treated as a sale or disposition of the property by you and may result in your realization of gain or loss. 2012 income tax return The gain or loss on the disposition of the property is measured by the difference between the FMV of the property at the time of the disposition and your adjusted basis (usually your cost) in the property. 2012 income tax return The character of the gain or loss (such as ordinary or capital) is determined by the character of the property. 2012 income tax return If the lender forgives all or part of the amount of the debt in excess of the FMV of the property, the cancellation of the excess debt may result in ordinary income. 2012 income tax return The ordinary income from the cancellation of debt (the excess of the canceled debt over the FMV of the property) must be included in your gross income reported on your tax return unless one of the exceptions or exclusions described later applies. 2012 income tax return For more details, see Exceptions and Exclusions, later. 2012 income tax return Nonrecourse debt. 2012 income tax return   If you owned property that was subject to a nonrecourse debt in excess of the FMV of the property, the lender's foreclosure on the property does not result in ordinary income from the cancellation of debt. 2012 income tax return The entire amount of the nonrecourse debt is treated as an amount realized on the disposition of the property. 2012 income tax return The gain or loss on the disposition of the property is measured by the difference between the total amount realized (the entire amount of the nonrecourse debt plus the amount of cash and the FMV of any property received) and your adjusted basis in the property. 2012 income tax return The character of the gain or loss is determined by the character of the property. 2012 income tax return More information. 2012 income tax return    See Publications 523, 544, and 551, and chapter 2 of this publication for more details. 2012 income tax return Abandonments Recourse debt. 2012 income tax return   If you abandon property that secures a debt for which you are personally liable (recourse debt) and the debt is canceled, you will realize ordinary income equal to the canceled debt. 2012 income tax return You must report this income on your tax return unless one of the exceptions or exclusions described later applies. 2012 income tax return For more details, see Exceptions and Exclusions, later. 2012 income tax return This income is separate from any amount realized from the abandonment of the property. 2012 income tax return For more details, see chapter 3. 2012 income tax return Nonrecourse debt. 2012 income tax return   If you abandon property that secures a debt for which you are not personally liable (nonrecourse debt), you may realize gain or loss but will not have cancellation of indebtedness income. 2012 income tax return Stockholder debt If you are a stockholder in a corporation and the corporation cancels or forgives your debt to it, the canceled debt is a constructive distribution. 2012 income tax return For more information, see Publication 542, Corporations. 2012 income tax return Prev  Up  Next   Home   More Online Publications
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The 2012 Income Tax Return

2012 income tax return 5. 2012 income tax return   Illustrated Examples Table of Contents Illustrated Example of Form 4563Line 1. 2012 income tax return Line 2. 2012 income tax return Lines 3a and 3b. 2012 income tax return Lines 4a and 4b. 2012 income tax return Line 5. 2012 income tax return Line 6. 2012 income tax return Line 7. 2012 income tax return Line 9. 2012 income tax return Line 15. 2012 income tax return Illustrated Example of Form 5074Part I. 2012 income tax return Part II. 2012 income tax return Part III. 2012 income tax return Illustrated Example of Form 8689Part I. 2012 income tax return Part II. 2012 income tax return Part III. 2012 income tax return Part IV. 2012 income tax return Use the following examples to help you complete the correct attachment to your Form 1040. 2012 income tax return The completed form for each example is shown on the pages that follow. 2012 income tax return Illustrated Example of Form 4563 John Black is a U. 2012 income tax return S. 2012 income tax return citizen, single, and under 65. 2012 income tax return He was a bona fide resident of American Samoa during all of 2013. 2012 income tax return John must file Form 1040 because his gross income from sources outside the possessions ($10,000 of dividends from U. 2012 income tax return S. 2012 income tax return corporations) is more than his adjusted filing requirement for single filers under 65. 2012 income tax return (See Filing Requirement if Possession Income Is Excluded in chapter 4. 2012 income tax return ) Because he must file Form 1040 (not illustrated), he fills out Form 4563 to determine the amount of income from American Samoa he can exclude. 2012 income tax return See Bona Fide Resident of American Samoa in chapter 3. 2012 income tax return Completing Form 4563. 2012 income tax return   John enters his name and social security number at the top of the form. 2012 income tax return Line 1. 2012 income tax return   On Form 4563 (see later), John enters the date his bona fide residence began in American Samoa, June 2, 2012. 2012 income tax return Because he is still a bona fide resident, he enters “not ended” in the second blank space. 2012 income tax return Line 2. 2012 income tax return   He checks the box labeled “Rented house or apartment” to describe his type of living quarters in American Samoa. 2012 income tax return Lines 3a and 3b. 2012 income tax return   He checks “No” on line 3a because no family members lived with him. 2012 income tax return He leaves line 3b blank. 2012 income tax return Lines 4a and 4b. 2012 income tax return   He checks “No” on line 4a because he did not maintain a home outside American Samoa. 2012 income tax return He leaves line 4b blank. 2012 income tax return Line 5. 2012 income tax return   He enters the name and address of his employer, Samoa Products Co. 2012 income tax return It is a private American Samoa corporation. 2012 income tax return Line 6. 2012 income tax return   He enters the dates of his 2-week vacation to New Zealand from November 11 to November 25. 2012 income tax return That was his only trip outside American Samoa during the year. 2012 income tax return Line 7. 2012 income tax return   He enters the $24,000 in wages he received from Samoa Products Co. 2012 income tax return Line 9. 2012 income tax return   He received $220 in dividends from an American Samoa corporation, which he enters here. 2012 income tax return He also received $10,000 of dividends from a U. 2012 income tax return S. 2012 income tax return corporation, but he will enter that amount only on his Form 1040 because the U. 2012 income tax return S. 2012 income tax return dividends do not qualify for the possession exclusion. 2012 income tax return Line 15. 2012 income tax return   John totals the amounts on lines 7 and 9 to get the amount he can exclude from his gross income in 2013. 2012 income tax return He will not enter his excluded income on Form 1040. 2012 income tax return However, he will attach his completed Form 4563 to his Form 1040. 2012 income tax return Illustrated Example of Form 5074 Tracy Grey is a U. 2012 income tax return S. 2012 income tax return citizen who is a self-employed fisheries consultant with a tax home in New York. 2012 income tax return Her only income for 2013 was net self-employment income of $80,000. 2012 income tax return Of the $80,000, $20,000 was from consulting work in Guam and the rest was earned in the United States. 2012 income tax return Thinking she would owe tax to Guam on the $20,000, Tracy made estimated tax payments of $1,409 to Guam. 2012 income tax return She was not a bona fide resident of Guam during 2013. 2012 income tax return Tracy completes Form 1040 (not illustrated), reporting her worldwide income. 2012 income tax return Because the adjusted gross income on her Form 1040 was $50,000 or more and at least $5,000 of her gross income is from Guam, Tracy must file Form 5074 with her Form 1040. 2012 income tax return All amounts reported on Form 5074 are also reported on her Form 1040. 2012 income tax return See U. 2012 income tax return S. 2012 income tax return Citizen or Resident Alien (Other Than a Bona Fide Resident of Guam) in chapter 3. 2012 income tax return Completing Form 5074. 2012 income tax return   Tracy enters her name and social security number at the top of the form. 2012 income tax return Part I. 2012 income tax return   On Form 5074 (see later), Tracy enters her self-employment income from Guam ($20,000) on line 6. 2012 income tax return She has no other income from Guam, so the total on line 16 is $20,000. 2012 income tax return Part II. 2012 income tax return   Tracy's only adjustment in Part II is the deductible part of the self-employment tax on her net income earned in Guam. 2012 income tax return She enters $1,413 on line 21 and line 28. 2012 income tax return Her adjusted gross income on line 29 is $18,587. 2012 income tax return Part III. 2012 income tax return   Tracy made estimated tax payments of $1,409. 2012 income tax return She enters this amount on line 30, and again on line 34 as the total payments. 2012 income tax return Illustrated Example of Form 8689 Juan and Carla Moreno live and work in the United States. 2012 income tax return In 2013, they received $14,400 in income from the rental of a condominium they own in the U. 2012 income tax return S. 2012 income tax return Virgin Islands (USVI). 2012 income tax return The rental income was deposited in a bank in the USVI and they received $500 of interest on this income. 2012 income tax return They were not bona fide residents of the USVI during the entire tax year. 2012 income tax return The Morenos complete Form 1040 (not illustrated), reporting their income from all sources, including their interest income and the income and expenses from their USVI rental property (reported on Schedule E (Form 1040)). 2012 income tax return The Morenos take the standard deduction for married filing jointly, both are under 65, and they have no dependents. 2012 income tax return The Morenos also complete Form 8689 to determine how much of their U. 2012 income tax return S. 2012 income tax return tax shown on Form 1040, line 61 (with certain adjustments), must be paid to the U. 2012 income tax return S. 2012 income tax return Virgin Islands. 2012 income tax return See U. 2012 income tax return S. 2012 income tax return Citizen or Resident Alien (Other Than a Bona Fide Resident of the USVI) in chapter 3. 2012 income tax return The Morenos file their Form 1040, attaching Form 8689 and all other schedules, with the Internal Revenue Service. 2012 income tax return At the same time, they send a copy of their Form 1040 with all attachments, including Form 8689, to the Virgin Islands Bureau of Internal Revenue. 2012 income tax return The Virgin Islands Bureau of Internal Revenue will process this copy. 2012 income tax return Completing Form 8689. 2012 income tax return   Juan and Carla enter their names and Juan's social security number at the top of the form. 2012 income tax return Part I. 2012 income tax return   The Morenos enter their income from the USVI in Part I (see later). 2012 income tax return The interest income is entered on line 2 and the net rental income of $6,200 ($14,400 of rental income minus $8,200 of rental expenses) is entered on line 11. 2012 income tax return The Morenos' total USVI income of $6,700 is entered on line 16. 2012 income tax return Part II. 2012 income tax return   The Morenos have no adjustments to their USVI income, so they enter zero (-0-) on line 28, and $6,700 on line 29. 2012 income tax return Their USVI adjusted gross income (AGI) is $6,700. 2012 income tax return Part III. 2012 income tax return   On line 30, the Morenos enter the amount from Form 1040, line 61 ($4,539). 2012 income tax return Their Form 1040 does not show any entries required on line 31, so they leave that line blank and enter $4,539 on line 32. 2012 income tax return   The Morenos enter their worldwide AGI, $54,901 (Form 1040, line 38), on line 33. 2012 income tax return Next, they find what percentage of their AGI is from USVI sources ($6,700 ÷ $54,901 = 0. 2012 income tax return 122) and enter that as a decimal on line 34. 2012 income tax return They then apply that percentage to the U. 2012 income tax return S. 2012 income tax return tax entered on line 32 to find the amount of U. 2012 income tax return S. 2012 income tax return tax allocated to USVI income ($4,539 x 0. 2012 income tax return 122 = $554), and enter that amount on line 35. 2012 income tax return Part IV. 2012 income tax return   Part IV is used to show payments of income tax to the USVI only. 2012 income tax return The Morenos had no tax withheld by the U. 2012 income tax return S. 2012 income tax return Virgin Islands, but made estimated tax payments to the USVI of $400, which they entered on lines 37 and 39. 2012 income tax return They include this amount ($400) in the total payments on Form 1040, line 72. 2012 income tax return On the dotted line next to the entry space for line 72, they enter “Form 8689” and show the amount. 2012 income tax return The Morenos do not complete Form 1116 because they receive credit on Form 1040, line 72, for the tax paid to the USVI. 2012 income tax return   The income tax they owe to the USVI ($154) is shown on Form 8689, line 44. 2012 income tax return They enter this amount on line 45. 2012 income tax return They also include this additional amount ($154) on the dotted line next to the entry space and in the total on Form 1040, line 72. 2012 income tax return The Morenos will pay their USVI tax at the same time they file the copy of their U. 2012 income tax return S. 2012 income tax return income tax return with the U. 2012 income tax return S. 2012 income tax return Virgin Islands. 2012 income tax return This image is too large to be displayed in the current screen. 2012 income tax return Please click the link to view the image. 2012 income tax return Form 4563, page 1 for John Black This image is too large to be displayed in the current screen. 2012 income tax return Please click the link to view the image. 2012 income tax return Form 5074, for Tracy Grey This image is too large to be displayed in the current screen. 2012 income tax return Please click the link to view the image. 2012 income tax return Form 8689, page 1 for Juan and Carla Moreno Prev  Up  Next   Home   More Online Publications