The interview on Financial Insider Weekly for this week is with William T. Mitchell, CPA. Our interview subject is "I owe the IRS! Now what?"
On July 21, 2014, Governor Brown signed AB 1391, extending California’s exclusion for cancellation of debt income for a principal residence through December 31, 2013.
Previously, the exclusion expired December 31, 2012.
This change conforms California’s exclusion effective date to the federal exclusion, which also expired on December 31, 2013. This item is one of the extenders that the U.S. Congress will consider, probably after elections are over in November, 2014.
Remember the limit for qualified indebtedness is much lower under California’s exclusion than the federal limit. It’s $800,000 for taxpayers who file joint returns, single persons, heads of households, and qualifying widows or widowers, and $400,000 for married persons or registered domestic partners who file separate returns.
The federal limit is $2,000,000 for most taxpayers and $1,000,0000 for married persons who file separate income tax returns.
California taxpayers who reported income from cancellation of indebtedness on their 2013 individual income tax returns should determine whether they can reduce their California tax by filing an amended income tax return.
When I called, each of the companies read from the same script. "You are not personally responsible for this debt. This account is now closed and frozen and will no longer accrue interest or penalties. As the personal representative, you will hear from our probate department."
The exclusion for cancellation of debt income for a principal residence mortgage is scheduled to expire after 2012.
Among many other federal tax provisions expiring after December 31, 2012, is the exclusion for cancellation of debt for a principal residence.
This week’s interview on Financial Insider Weekly is with William Mitchell, CPA Our interview subject is, "I owe back taxes to the IRS! Now what should I do?"
According to Revenue Ruling 92-92 and page 3 of IRS Publication 4681, cancellation of debt attributable to passive activity expenditures, such as purchase of the rental property, is passive activity income. For a rental property, the debt cancellation income should be included on line 3 of Schedule E as "rental income" for the property.
California has enacted relief legislation for cancellation of mortgage debt relating to the acquisition of a principal residence, effective for taxable years 2009 through 2012.
Governor Schwartzenegger vetoed SBX8 32 last Thursday, March 25, 2010. The bill included many provisions conforming California tax laws to Federal tax laws, including a limited conformity to an exclusion from taxable income for cancellation of debt for a principal residence.