Is My Court-Forgiven Support Arrearage Taxable?

Q: My child support and alimony to my ex was reduced by court order in 2008. At the same time, the accrued arrearages was changed to zero. My ex has informed me that she will issue me a 1099 for the change in arrearage as a debt forgiveness on her part. Is this change in what I owed her a debt forgiveness that has to be reported in my income?

A: No. What you are describing is a reduction in debt by court order, similar to what happens in a bankruptcy reorganization. This is not taxable debt forgiveness under IRS Publication 525, Taxable and Nontaxable Income. It is treated as a correction of the amount owed. Your ex-spouse should not issue a 1099 to you for the change in the arrears owed to her, nor should she deduct that amount from her taxable income.

If you receive a 1099 from your ex-spouse, do not include that 1099 "income" amount in your listed income for 2008. Attach a copy of the invalid 1099 with your tax return as filed, and also include a "true copy" (a copy stamped by the court clerk) of the court's order that changed the amount. You should also write a brief explanation of these attachments to the IRS somewhere on your return, or on a separate paper attached to the return.

My 5-year old received a 1099. Now what?

Q: My five-year old received a full scholarship to attend a private (for-profit) elementary school in 2008, which included a pre-kindergarten summer day-camp, a uniform allowance, breakfast and lunch, field trip fees, and after-care in the school's day care section. The school sent us a huge 1099 for the amount of the tuition as well as all the extras. It was issued in my child's name and with his social security number. I'm a single parent making less than $20,000.00 per year. What do I do?

A: The first thing I would suggest is to contact the school and ask them to issue a corrected 1099. The amount of the tuition, the uniform allowance, and the field trip fees are not taxable, since they are a scholarship under IRS rules and not taxable income to the grantee (see IRS Publication 970 and IRS Publication 525 ). It is possible that the remaining amount (food and day care) may be taxable, but that may also be characterized as a charitable gift, which would not be taxable to you. If the school is willing to issue a corrected 1099, you should ask them to place the corrected 1099 in your name and social security number, and not your child's.

If the 1099 is reissued by the school as anything but zero, and it is still in your child's name and under his social security number, or if they refuse to issue a corrected 1099, you will have to file a separate tax return for your child, and you will be responsible for paying any tax that is assessed. If you file a separate return for your child, you may sign your child's name to the return and add your signature, per these instructions from IRS Publication 929: If the child cannot sign his or her return, a parent or guardian can sign the child's name in the space provided at the bottom of the tax return. Then, he or she should add: “By (signature), parent (or guardian) for minor child.”

If the school changes the 1099 to place the imputed income in your own social security number, you may include the 1099 with your tax return for 2008. Subtract the non-taxable scholarship income, and report the remaining (taxable) income as follows:

Form 1040EZ. If you file Form 1040EZ, report the taxable amount on line 1. If the taxable amount was not reported on Form W-2, enter “SCH” and the taxable amount in the space to the left of line 1.

Form 1040A. If you file Form 1040A, report the taxable amount on line 7. If the taxable amount was not reported on Form W-2, enter “SCH” and the taxable amount in the space to the left of line 7.

Form 1040. If you file Form 1040, report the taxable amount on line 7. If the taxable amount was not reported on Form W-2, enter “SCH” and the taxable amount on the dotted line next to line 7." from IRS Publication 970, Tax Benefits for Education

Do not ignore the child's 1099, even if all of the income reported is from the scholarship and nontaxable. Whenever a 1099 is issued, the IRS will receive a copy. If you cannot convince the child's school to correct the 1099, you will have to address it in a tax return, either yours (if it is issued in your name) or your child's (if it remains in his). If your child continues on a scholarship basis at the same school, you may expect to address this issue in future years.

Is My Mortgage Relief (Debt Forgiveness)Taxable?

Q: When we started to go into foreclosure last year, we negotiated with the bank, and they set a meeting to sign all the papers needed to give the house back to the bank for forgiveness of the mortgage. The house was worth much less than the mortgage at the time the bank took it back, but we did not have any debt to the bank after we signed it over. Do we need to report the forgiven portion of the debt as income?

A: The good news is, there is probably no taxable debt relief to report. The Mortgage Forgiveness Debt Relief Act of 2007 specifically allows taxpayers to avoid claiming mortgage debt relief as debt forgiveness income, whether the debt forgiveness was from a walk-away as you describe, or forgiveness of the debt after foreclosure and re-sale, or mortgage restructuring that forgives part of the mortgage debt.

The bad news is, the debt relief was too new to make it into most tax software packages for 2008, so to claim this debt relief, you will need to fill out Form 982 and attach it to the back of your tax return.

IRS publication 4681 has detailed examples of the type of forgiven debt that is (and is not) eligible for relief.

Is My 2008 Stimulus Payment Taxable Income?

Short answer: No. The 2008 Economic Stimulus Payment is not taxable income for your 2008 income tax return.

But you were right to ask about it. When the president signed H.R. 5240 in February 2008, he referred to the economic stimulus payments as "tax rebates" and the I.R.S. was given the task of sending out the payments. To make matters even more confusing, the payments were not available to people that didn't file a tax return, nor were they available to people that had a zero tax burden for 2007. Without Congressional action, the payments would have been taxable, just like a refund payment is taxable. Fortunately, H.R. 5240 specifically stated that the payment would not be taxable income.

In small print at the beginning of a FAQ at irs.gov, the IRS informs taxpayers of this. It's understandable that most people didn't catch that, and many tax professionals have been cautious about confirming it. My research assistant was looking for it diligently, and still took several tries to find exactly where the IRS admitted it, here: Basic Information on the Stimulus Payment: "What is it? It's an economic stimulus payment that more than 124 million households will receive. It's not taxable, and it won't reduce your 2007 or 2008 refund or increase the amount you owe when you file your 2008 return."

And another mention on page 62 of the 2008 1040 Instructions: "Economic stimulus payment. Any economic stimulus payment you received is not taxable for federal income tax purposes but reduces your recovery rebate credit."

Other resources:

Full text of H.R. 5240

Bill signing announcement

Welcome

Welcome to my blog, where I will try to give general answers to frequently-asked tax questions. Please keep in mind that these answers are for a general audience. Your specific, individual tax problem should be addressed by a professional that has access to your documents and tax history. While I hope these answers are helpful, you should not rely this advice to make any decision on how to file your taxes.

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