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PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4030
Experience:  35 years tax experience, including four years at a Big 4 firm.
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Wells Fargo gave me a reduced interest rate home mortgage durin

Customer Question

Wells Fargo gave me a reduced interest rate for my home mortgage during my Military Service time. The result was a refund of 95,000. Instead of giving me the money they applied it directly to my home loan. My loan was current with no late payments. I would say this great except I have to pay taxes on the 95,000. The result is it put my income to the next tax bracket and reduced or eliminated any deduction I normally get and I have a resulting federal tax bill of An additional $32,000 and almost $10,000 from state. since I didn't actually get a say on what happened with $95,000 nor put aside any money for taxes. I have a tax bill I can't pay without getting loan. Is this legal for Wells Fargo not to refund the money to me? Are there any laws to help me?
Submitted: 6 months ago.
Category: Tax
Expert:  Barbara replied 6 months ago.
Welcome to Just Answer. My name is ***** ***** I will be happy to assist you.The Mortgage Debt Relief Act of 2007 has been extended through 12/31/2016. This means you can exclude from income the $95,000 payment reduction amount. If you received a 1099-C for that amount, you will use Form 982 to exclude it as income., California does not conform to the federal legislation that allows taxpayers to exclude forgiven mortgage debt from taxable income. Please let me know if I can assist you further.Thank you and best regards,Barb
Customer: replied 6 months ago.
why answer the question if you give me a answer that is not related to my situation. The 95,000 was a overpayment of mortgage interest not debt forgiveness. I was completely current on my home loan. The mortgage debt relief doesn't apply to me. I want to know why Wells Fargo applied it to the loan versus paying me back. I understand it's Wells Fargo policy to put overpayments of interest toward the loan, but it's considered income and money I have to pay taxes - on why does it have to go toward the loan.
Expert:  Barbara replied 6 months ago.
The Mortgage Debt Relief Act of 2007 applies to different scenarios. I will request customer service forward your question to a real estate attorney who may be able to assist you.
Expert:  PDtax replied 6 months ago.
Hi from Just Answer. I'mCustomer Since your first expert opted out, I can assist. The problem with the debt reduction, even from a reduction in mortgage interest charged, is that you did benefit. Hence the 1099-MISC reporting. The good news is there might be relief form the tax cost. There is an old provision in the Federal tax Code (§ 111 (a)) called the tax benefit rule. "Gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax imposed by this chapter." If you receive a repayment for a prior year deduction, it is taxable ONLY TO THE EXTENT YOU RECEIVED A TAX BENEFIT. If you itemized deductions in prior years, only the amount of the interest you paid that created tax deductions would be taxable. If, for example, you did not itemize, then none of the $95,000 would be taxable. Best is to review the prior year returns and determine the amount, if any, of the taxable portion of the repayment. A good tax pro can assist. Sadly, this doesn't fix the potential income tax problem of having your mortgage reduced by almost $100,000. There are arrangements that can be made with IRS if any additional taxes are due. Thanks for asking at Just Answer. Positive feedback when you rate my assistance is appreciated. I'mCustomer
Customer: replied 6 months ago.
Thanks my guess is we did itemize mortgage interest. And yes I did benefit -super happy with the reduced interest rate. I'll find out if we can redo the taxes from previous years to remove the itemized deduction so that the increased income is spread over a few years. I just need to find out if my military benefits will protect me from penalties and interest from the irs by changing deduction so that I would owe. Also still not sure why Wells Fargo couldn't pay me the over payment of interest versus applying to the loan. My loan has always been current. Also not happy with having such an unexpected tax debt.
Expert:  PDtax replied 6 months ago.
You likely can ask for and receive IRS penalty relief after all the math is done. Interest should be low for some time. And IRS will accept installments over five years or longer if needed.Since this is not part of SCRA, there is no relief in the law for the tax cost. You might consider a home equity loan for the taxes if needed, but the IRS installment is likely the easiest to arrange.Positive feedback is appreciated when you accept and rate. I'mCustomer

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