Have you had your mortgage debt partly or entirely forgiven during tax years 2007 through 2012? If so, you need to be aware of the tax facts regarding mortgage debt forgiveness. Most importantly, you may be able to claim special tax relief and have the forgiven debt excluded from their income.

Here are ten more tax facts the IRS wants you to 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, 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 do 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.

Refer to IRS publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments, for more about the Mortgage Forgiveness Debt Relief Act of 2007.

For more tax relief facts that may affect you this tax season, visit the IRS website.

source: irs.gov

You may see changes in your take-home pay in 2011 due to the enactment of the Tax Relief and Job Creation Act of 2010 on December 17, 2010. The Tax Relief act extended for two years the income tax rates that were scheduled to expire at the end of 2010; that extension prevented a large increase in federal income tax withholding.

However, the new law did not extend the Making Work Pay (MWP) credit that had been available for tax years 2009 and 2010. While most workers qualified for the maximum MWP credit, pension recipients did not qualify for any MWP credit unless they also had wages or other earned income.

In December 2010, the IRS published new federal income tax withholding information to reflect the impact of the Tax Relief Act. The fact that the MWP credit expired, by itself, would have resulted in increased withholding for most taxpayers. However, under the Tax Relief Act, withholding for social security tax for all wage earners was reduced from 6.2% to 4.2% (withholding for Medicare, at 1.45%, did not change). For most employees, the net effect of these two changes will result in less total tax being withheld from their checks. The social security tax reduction does not affect pension payments.

Due to the late enactment of these tax law changes, the IRS asked employers and plan administrators to adjust their systems as soon as possible but not later than January 31, 2011. This means employees and pension recipients may not have seen the full impact of these changes until their first paycheck in February, 2011.

Once employers implement the changes, there will be a net increase in take-home pay for most employees (excluding the impact of any other withholding amounts, such as withholding for health insurance, state income taxes, etc.).

Once pension plan administrators implement the 2011 changes, the retirement check payments for some pensioners may be lower depending upon the method that their plan administrators used to calculate withholding in 2010. Because the MWP credit did not apply to pensioners, the IRS published a table for 2009 and 2010 giving plan administrators the option of increasing withholding for their pension recipients. Not all plan administrators made the optional adjustment and instead allowed pensioners to make the adjustment when they filed their tax returns. Since the 2011 withholding tables do not reflect the expired credit, pension recipients in this situation are likely to see the withholding for their 2011 pension payments increase by approximately $7 to $50 per payment, depending on filing status, the amount of the payment, and how often the payment is made.

IRS encourages both employees and pensioners to review their withholding every year using the withholding calculator on IRS.gov and, if necessary, fill out a new W-4 or W-4P form and give it to their employer or pension plan administrator.

Taxpayers should be aware that the Tax Relief Act may affect the amount of your tax-home pay in 2011.

For additional information on the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, or for IRS tax help, visit the IRS website.

source: irs.gov

Yes, its true that the Obama tax cuts will reduce income tax rates and Alternative Minimum Tax (AMT). It will also provide tax relief by reducing employee-paid payroll taxes. It’s called the Payroll Tax Holiday.

The Payroll Tax Holiday provides tax relief by reducing the amount of Social Security tax employees pay on wages earned and self-employed individuals pay on all of their self-employment income (up to $106,800) by 2%. Under current law, employees pay a 6.2 percent tax and the self-employed 12.4 percent.

This tax holiday is only temporary however; it provides tax relief for one year. This means that during 2011, employees will pay only 4.2% on wages and self-employed individuals will pay only 10.4% on income in Social Security tax.

So, everyone should be happy, right? Not so fast!

Progressive advocates and many Democrats are concerned that the payroll tax cut will pose a threat to Social Security. Not because they don’t want workers to have extra cash in their pocket, but because they worry the temporary payroll tax rate will become the norm and leave Social Security competing with other programs for funding – and threatening Social Security benefits.

However, several top Republicans maintain they’re not interested in extending the payroll tax cut. Their “gut feeling” is the tax will be allowed to expire as planned.

Although the tax cut is only 2%, it represents a significant tax reduction of 32 percent. For instance, a worker currently earning $100,000 will pay $6,200 in payroll taxes in 2010, and $4,200 in 2011.

Good, tax relief for the working man, right? Nevertheless, consider…

The Congressional Budget Office estimates the cut will reduce federal revenues by $112 billion over the next two years. Because the tax package is not offset by changes elsewhere in the budget, the government will have to borrow to fill that hole in the Social Security trust fund.

Not so good, no relief for our national debt.

Sources: democrats.senate.gov, thehill.com, democraticunderground.com