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I am preparing my 2012 federal income tax return for its October 15th deadline (before April 15th, I requested an extension). The chore is complicated because of the circumstances of my life in 2012. In January, my mortgage debt was discharged in a Chapter 7 bankruptcy proceeding. I know that the bankruptcy will add Form 982 to the forms that I must submit. Form 982's instructions say that I must check box 1a) and then--because I do not have any of the tax attributes listed in Part II, I must follow three instructions about what I need to add to Part I. The first two instructions are straightforward, but the third...wow! Could you "decode" it please? It reads "include on line 10a the smallest of (a) the basis of your nondepreciable property, (b) the amount of the nonbusiness debt included on line 2, or (c) the excess of the aggregate bases of the property and the amount of money you held immediately after the discharge over your aggregate liabilities immediately after the discharge."
I cannot even find a definition of "nondepreciable property!" My very simple life seems more simple than what the IRS is assuming about their taxpayers.
Here are the facts. By 2012, a major medical condition had roared into my life, eventually causing me to leave a deeply loved home on the east coast and move to Texas, where a relative could let me have a guest room while I struggled to recover my good health. I had no income of any sort in 2012 (I drew on my Roth IRA as needed). I do not own a business, an automobile or other vehicle, a piece of property, a yacht, a valuable work of art, a diamond tiara, or anything else that could not be found easily at a yard sale.
At the end of 2012, I sold the apartment whose stubborn unwillingness to be sold previously had led to the declaration of bankruptcy. Even if I do not factor in the bankruptcy's dramatic decrease in the apartment's basis, I sold at a loss. Still, selling the apartment meant that back payments to the mortgage lender were made in full.
How to I portray the facts accurately to the IRS? My goals: to fill out Form 982 accurately; to avoid having my report of zero income misunderstood; to itemize my deductions (as I am experienced in doing) in order to recover a substantial amount of 2012 mortgage interest and 2012 property taxes that I paid when the apartment (on the east coast) finally sold; and to claim a deduction for Texas sales tax in my itemized deductions (which is fair; at the end of 2010, Texas became my permanent home). One last question: In my itemized deductions, I cannot include medical expenses, since they would have to include 7.5% of my income, and I have no income. Am I right?
In regard to what I tried before I contacted JustAnswer: I tried to make sense of the IRS's instructions. I used to think that I had a reasonably good level of reading comprehension...oh, silly me.
HI, this is fairly straight forward if you just take the word aggregate as meaning total and basis as meaning purchase price (and bases meaning the plural of basis); Calculate those three numbers and see which is the smallest; (a) basis of non-depreciable property means, in layman's terms, Total amount paid for everything you own (that wasn't some sort of asset that can be depreciated like a rental property or business equipment) ... then ... (b) the amount of non-business debt included on line 2, for non-business owners means whatever's on line 2 (If you'r a business owner, you have to subtract the business debt out of that number) ... then ... (c) the excess of the aggregate bases of the property and the amount of money you held immediately after the discharge over your aggregate liabilities immediately after the discharge (member aggregate means total and bases is just the plural of basis) ... so you just (i) add up the basis (that purchase price again) of everything you own (that's the aggregate bases) then add any cash you have TO that, ... (ii) then add up the total of all liabilities (that's the aggregate liabilities) ... and (iii) subtract the second on from the first one (that's the excess part)
Whichever of the three "answers," (i), (ii), or (iii) is smaller goes on line 10a ... just remember that your supposed to use the balances as of the time JUST after the debt was forgiven
I still don't see you coming into the chat session, so I'll move us to the "Q&A" mode. … Maybe that will help … (We can still continue a dialogue there, just not in real-time chat, as we can here)
Please let me know if you have any questions at all ...
I am back with a clear idea of what I still do not completely understand.As I realize what a help it is to have you "walk me through" the unfamiliarparts of my 2012 return, I also realize that I am asking more than onequestion. It seems to me that I should pay you more than $24. Once you havemoved me to a state of total clarity, can I arrange with JustAsk toincrease the amount that I pay you?
Here are my follow-up questions, written very clearly, I hope!
Background to the first three questions: On Form 982, I am instructed toput on line 2 the amount of discharged nonbusiness debt (which waseverything discharged in the bankruptcy proceeding) that is excluded fromgross income. Then it says, "If you were insolvent, do not include morethan the excess of your liabilities over the fair market value of yourassets."
Question 1: Since my 2012 gross income of not quite $7,000 (from fundswithdrawn from a Roth IRA and a dab of interest) was dwarfed by the almost$300,000 in debt that the bankruptcy court discharged, does the instructionthat begins "If you were insolvent" apply to me?
Question 2: In the sentence I just quoted, does "over" mean "divide by"which is the way the word "over" is used in math classes, or does it mean"subtract"? (I have the same question about the meaning of "over" inrelation to the calculations for line 10a.)
Question 3: Do I include in checking and savings accounts in both of thefollowing calculations: the aggregate bases of my property and the fairmarket value of my assets?
Question 4: On the Form 1040, does it make sense to exclude all of myincome from gross income? Since the Roth money is not taxable, it seemspointless to state a gross income of zero, even though I have the groundsfor doing so, but something that seems pointless to me may seem verydifferent to an expert. Your advice would be welcome!
My final questions are related to itemizing deductions:
Question 5: I remember that in order to be claimed as deductions, medicaland dental expenses must equal or exceed 15% of income. My 2012 medicalexpenses undoubtedly exceed my income of not quite $7,000, but does mycomplete lack of EARNED income make me ineligible in a weird way to claimmedical expenses as a deduction?
Question 6: For categories of itemized deductions other than medical anddental, I claim the deductions that I honestly can claim, and my income (orits source) has nothing to do with it. Am I right about this?
Question 7: Finally, will it seem odd to the IRA if I claim deductions formortgage interest and property tax in the District of Columbia while alsoclaiming a sales tax deduction for Texas? My guess is: Probably not. Surelythe IRS sees this sort of odd situation quite often. Am I guessingcorrectly?
Thank you, XXXXX XXXXX staying with me all the way to the point of my havingcomplete clarity. Let me know if I need to clarify any of my questions.
P.S. Question 3, as follows, was missing the word "money." Do I includeMONEY in checking and savings accounts in both of the followingcalculations: the aggregate bases of my property and the fair market valueof my assets?
Let's label this Question 8. I just realized that I probably was thinkingin a wrong-headed way when I asked you Question 4. I think now that thedespite having had a large debt discharged in a bankruptcy proceeding, anddespite having sold my apartment at a loss, my 2012 taxable income of $30in interest is still taxable income. I have no excuse for excluding it orthe non-taxable Roth IRA money from my gross income. Am I right?
...or maybe I was not wrong-headed in Question 4. I have not yet lookedhard at Schedule D, but I think that selling my apartment resulted in acapital loss, and I CAN deduct it from my income. The debt that wasdischarged through bankruptcy is not added to my income, I know, but itprobably is not subtracted...or am I wrong here, too? I need to sit down,shut up, and wait for your guidance about showing or not showing losses onForm 1040.
Learning how to use JustAsk has been a bumpy process for me. I just now had a customer service representative guide me through the process that takes me to your and my Q & A page. Now, I need to eat lunch and then--with a nourished brain--read your second set of answers and see where I am.
I am glad to know that I can provide a bonus for you. Although I do not think that we need to do much more Q&A'ing, you have invested a lot of time so far, and I care very much about being fair to you. When I reach the point of saying that I understand everything I need to understand, I would appreciate your assessment of the value of the time you have spent on me. I do not know if you are allowed to do that, but some guidance would be VERY welcome.
Expect to hear from me again within the next two hours or so.
Thank you for taking the time to write really good answers to my questions. I have read carefully through what you wrote, and I feel "almost there" in regard to having all the insights that I need.
Now I need to take a break. I think I mentioned to you that I am battling to get a medical condition under control. The long battle (since 2006) is going well, but I still am vulnerable to an energy slump in the afternoon, and this has been a taxing day (pardon the pun!)
I will be back later, though, with some final and very easy questions. Then we can settle my monetary debt to you. If I have new questions later in the week, as I work on preparing my return, I can submit them as new questions (since the goal of compensating you adequately is at the forefront of my mind).
Thank you, XXXXX XXXXX your morale-boosting note. I am indeed feeling better, as I typically do from 4:00 PM onward. My attention has been soaked up, however, by mastering the real estate part of my tax return. Time got away from me. I hope that your being in no hurry at all means that my sending you my last questions tomorrow will be soon enough.
Wishing you a good evening,
Thank you for another thoughtful note, this latest one saying "I'll be here." As I cope with this year's enormous tax preparation job, it is helping me a lot to feel well connected to your expertise (and also your sense of humor!)
Speaking of humor, I have a tongue-in-cheek comment to make before I ask you questions. In reality, I now have a good understanding of the difference between depreciable and nondepreciable property. My common sense, however, rebels at the idea that the term "nondepreciable" has any relation to items such as clothing (which lose all value when they fall off my body) or a piece of exercise equipment (for which replacement parts eventually are no longer made) or various pieces of electrically powered gear (which would cost far more to repair than to replace). If I had any diamond-studded jewelry, I might say, "Okay" to "nondepreciable."
Before going any farther, I would like to ask for a dab of clarification In two areas of your answers. Since today's letter is my second follow-up communique, I will add a B to the number of each item that follows.
1B - In the answer to my follow-up question #6 concerning itemized deductions, you wrote "(the form will tell you...if something needs to be adjusted)." Is "form" indicating Schedule A, the instructions for Schedule A, or something else?
2B - Thank you for the URLs for information about itemized deductions. My question is: Will any of the three be helpful only for 2013, or will any or all of them help me with my current chore of filing a tax return for 2012?
Now I would like to make three statements that I think are accurate. For each one, feel free to respond with a "Yes" if my understanding is indeed accurate:
3B - I need to attach Form 982 to Form 1040, but I do not need to transfer any numbers from Form 982 to a line or box on Form 1040.
4B - When the IRS (and thanks for letting me know I am not the only person who means IRS while typing IRA) says that forgiven debt can be excluded from a person's gross income, they only mean that the forgiven debt does not need to be added to income; they do NOT mean that any of the forgiven debt can be deducted from income--is this correct? The answer seems so obvious that you might wonder how I can ask the question with a straight face, but I thought "It cannot hurt to ask." Where tax return wisdom is concerned, more is more.
5B - The term "basis of nondepreciable assets" means how much I paid for my shoes, bed sheets, and so forth, whereas the term "fair market value" means how much each item would be worth if I sold it. An excellent example, I think, is my two pairs of eyeglasses with prescription lenses, purchased in 2004. Their aggregate basis is $800, but the lenses (the most expensive component) would not have any market value at all. Only one pair of frames is in mint condition. Ebay might help me calculate a FMV for the frames, but I would bet that Ebay evidence would suggest a FMV of less than $50.
Finally, I have new questions about the beloved Form 982, all of them about instruction #2 in the "any other debt" section. (Did I once say that Instructions #1 and #2 were straightforward? I am now saying, in regard to instruction #2 "Think again!").
6B - At the beginning of the second sentence of Instruction #2, does the qualifier "If you were insolvent" mean "If you are attaching Form 982 because of insolvency without bankruptcy" (in which case I can ignore it, since I am reporting a Chapter 7 bankruptcy), or does it apply to me?
7B - If your answer to the preceding question is "Ignore the second sentence," then it is okay to ignore this question. If "insolvent" applies to me, however, then do I answer on the basis of my financial situation just after the discharge of debt or just before? The bankruptcy proceeding that concluded on January 21st did not remove a student loan debt (later forgiven in an adversarial proceeding as part of the same case). With some careful sleuthing, I can figure out if the student loan balance slightly exceeded my savings on January 21st, if it matters. Otherwise, I was not insolvent in the time just after January 21st.
8B - Hopping back to the first sentence of Instruction #2, is "the amount of discharged nonbusiness debt" the same as the aggregate debt that the bankruptcy court discharged?
9B - This question is related to the preceding question. The student loan is the only debt for which I have an exact dollars-and-cents figure for the size of the debt when it was discharged. For the first part of the bankruptcy proceeding, I know that as the trustee talked to my attorney and me, the trustee was able to look at a list of my creditors (my mortgage lender, a condominium association, and two utility companies--electricity and gas) along with the amounts owed that I had reported to my attorney. When I compiled the report in September, the dollar-and-cents amounts were reasonably accurate. In regard to the discharge of debt on January 21st, however, true accuracy is elusive. Late fees and interest are not completely knowable for all four creditors, especially if I need to pin them down to a specific date in January. If I estimate the amounts very carefully, will an estimate be good enough?
There! That is it, I think. Here is one more tongue-in-cheek comment before I close. In regard to being mystifying, I think that Form 982 is in a class by itself. I have been so determined to gain complete clarity that I have been sleeping with Form 982 under my pillow each night. It is not working. I think I should give up on the goal of cognitive clarity and just be grateful (and seriously, I am) to have your clear and deeply insightful help.
P.S. After successfully launching another lengthy follow-up letter, I found myself looking at a comment from JustAnswer that I should expect a reply within 15 minutes. What insanity! Send a reply only as soon as it is rationally feasible.
In the case of the sales vs income taxes, note that the schedule A says the following:
State and local (check only one box):Income taxes, Box A orGeneral sales taxes, Box B
The best answer to your question here is that usually the form will indicate (as here) OR will refer you to another form or the instructions,
Deductions dont really change that much. SOME laws change, (rates and brackets change pretty much every year) and even some of the no more than and no less thans change (such as with the medical deductions I referenced before) BUT mist of the deductions themselves dont change because those are there for policy reasons .. e.g., property taxes and the State and local income OR sales are there because it always been believed that you shouldn't be taxed twice on the same dollar ... the mortgage interest deduction and the exclusion of gain on personal residence sales have been there for ages because the government is trying to inventivize home ownership.I have not scanned the list, but Id be surprised if anything much (other thn maybe some of the limits) have changed at all.
Thats actually very perceptive on your part; Excluded means NOT INCLUDED as INCOME At ALL ... where deducted means its reported and then deducted somewhere on the forms such as schedule A for mortgage interst or the front of the 1040 for the self employed health insurance deduction
Exactly, you have it.
Thats right you are asking for the bankruptcy exclusion
I think the answer to that question is here in the instructions: Check the box on line 1a if the discharge was made in a title 11 case (see Definitions on page 3) or the box on line 1b if the discharge occurred when you were insolvent (see Line 1b on page 3).
Remember, the bankruptcy exclusion and the insolvency exclusion are two different exclusions ... to provide context, Mortgage debt, insolvency and Bankrupty are the three exclusions under the act.
Remember that you only need to show that you were insolvent. Any debt above that is irrelevant .. Err on the conservative side and report only what you know to be true .. any fees or othr accruals will only add to your case.
Thank you for another set of very helpful answers. I want to read through them a second time, because I think that there is a small bit of final "mopping up" that we need to do. I should look at my questions and your answers with a fresh brain, so I will be in touch tomorrow.
Meanwhile, I will get in touch with JustAnswer's customer service folks to find out how to give you a bonus. It would be warranted no matter what, but to fail to give you a bonus would be downright appalling since the price I will pay for all of your time will be $15.00. I only said "Yes" to having the price tag bumped down from $24.00 because you had told me that I could provide a bonus. As for why I agreed to a price reduction, let me just say that as a 63-year-old, I have had many years of observing the way people act and react (or fail to). It seems to me that sometimes if a worthwhile service is not functioning well in one area, if an unhappy customer can make the failure financially painful, even a little, it can help to move a customer service representative beyond saying "I am sorry" and into the realm of reporting the problem to the managerial level.
The thought of your receiving $7.50 for what you have done for me is downright appalling, though, so I want to be sure that the bonus-bestowing process unfolds. As we near that point, is there any way that you can give me some guidance about what would feel fair to you? I am thinking in terms of your saying that people with your level of expertise, living in your geographic area, typically are worth X dollars per hour and you estimate the time invested in me to have been thus-and-such. In case you would prefer addressing this topic in a conversation, my phone number is XXXXX I welcome your using it without hesitation.
Looking at some other Q & A exchanges from JustAnswer this morning, I noticed that another customer had provided a phone number, which was blocked out. I hope that the redacting was done before posting the Q & A publicly and not before the expert received the letter.
Thanks again, Lane, for offering an email address. It is a help to have. I am just sorry that I did not realize I was cheating out of a $5.00 fee, but we have talked about a bonus. One will follow shortly.
First, I want to make one last statement and have you verify it as correct. In the three-item "any other debt" section of my bosom buddy, Form 982, I will deal with:
Instruction 1 by checking the box on line 1A;
Instruction 2 by estimating my debt at the time my bankruptcy proceeding came to a close (and you are so right about the wisdom of erring on the conservative side); and
Instruction 3 by calculating the basis of my nondepreciable property and using it to see whether (a) or (c) is smallest. Do I have this right?
Before I let you off the line, I want to ask about two aspects of Instruction 3. First, Option (c) instructs me to calculate "the excess of the aggregate bases of the property...." Does that mean the property I still owned after my bankruptcy proceeding had concluded? (Drat, but I wish they had not taken my diamond tiara away from me.)
Second, Option (c) says "the excess of the aggregate bases of the property and the amount of money you held immediately after the discharge" (over and above) your aggregate liabilities. The first sentence of Option (a), which is the sentence that is relevant for me, does not specify "money," but should I include my mutual funds and checking account balance anyway?
Finally, I could use a judgment call. Until this morning, I had assumed that I would define "just after the discharged debt" as being just after the traditional part of a Chapter 7 bankruptcy came to a successful end in January. Now I am thinking, if my student loan debt was forgiven in July in an adversarial procedure, but this not-so-traditional part and the traditional part of my bankruptcy were assigned the same case number, and if the two processes overlapped in time by quite a bit, then I probably should define "just after" as being the day after my student loan was forgiven.
Although it seems certain that the entity holding my student loan is not going to issue a 1099, I would be more comfortable with including the money in a summary number somewhere, just in case the student loan folks send a 1099 to the IRS but not to me (a kind and compassionate person at the IRS told me that they have software that matches social security numbers with 1099s, so I might be blindsided in the way just described).
I have come to feel the same way about the debt forgiveness that my mortgage lender irrationally bestowed on me. When I made a "Where is my 1099?" phone call, I was given every reason to think that I did not need to report the discharged debt as income. I can include it in my calculations of the basis of my apartment, however. The result will be that selling the apartment would create a painful amount of taxable income if it were not for my qualifying for the up-to-$250,000 exclusion. (I think again for the guardian angel that watches out for little children and fools like me!)
As I work on this tax return, which you have made entirely manageable for me, my policy will be to make conservative choices in what I report (e.g., the mortgage lender forgave $47,235.53 or some such number, so I can round it up to $48,000. I intend to be sure that every significant amount of money goes into one of the summary numbers, and I will keep careful records that break down each summary number and that have explanations of each of my decisions. Then I will be sure that anything that needs to be documented is backed by adequate evidence.
At this point, I am feeling somewhat Teflon-coated. Thank you for enabling me to feel that way. I look forward to what ought to be the final reply that you need to make to me.
Sounds good, Lane, and do not push to send an answer as soon as possible. What I thought were easy questions turned out to be a lot for you to think through. A "within 15 minutes" answer definitely is not warranted!
I understand completely, Lane, and thank you for a time estimate. It enables me to set aside the work that I expect to do when I gain additional clarity from you and turn my attention to a hundred and one other chores that await me.
Before writing simply to say a deeply felt "Thank you," I took the time to look at everything I have asked you and at every reply. I agree with you; we are done, at least unless my work on my tax return makes me realize that I have a new question.
You have been exceptionally helpful. Truly, there are not adequate words for telling you what a positive impact you have had on me.
Here is a more compressed final message for you to read. I have looked closely at every exchange of questions and answers, and I agree with you. As are done, unless my work this weekend on my complex tax return opens a new avenue that for me--such a layperson--opens up fresh potholes.