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is there any point in changing my tax withholding?

Our bank finally approved the short sale on our home. Because we don’t live there we aren’t covered under the mortgage act that protects us from having to pay taxes on forgiven debt.

I did some quick and dirty estimates that show our taxes on the “income” will be about six thousand dollars more than what we “usually” pay.

Is there any point in changing my tax withholding from married 2 to something else? I don’t think even if I claimed single 0 that it would cover the extra taxes we have to pay?

Second question: The only way to not have to pay taxes on the forgiven debt would be to show that we are insolvent at the time of the short sale. Should I do an insolvency form at the time of the short sale to ensure accuracy or do I wait until it’s time to do taxes?

None of this will be an issue until we do our 2012 taxes because closing won’t be until next year at some point.

Thanks.

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4 Responses to "is there any point in changing my tax withholding?"

  1. Cathi K says:
    The mortgage relief act says if this is your primary residence and it is your original purchase loan then the debt is forgiven. If you refinanced then the money used to improve your home is forgiven and money used for other purposes is not forgiven.
  2. Kate says:
    Personally I wouldn’t change. You could just save the money. The IRS will do a payment plan with you (with interest, of course) and if you find yourself needed the extra money you may want to not have it going to taxes you don’t need to pay yet.

    You do the insolvency form to the day before the debt was forgiven.

  3. Bostonian In MO says:
    Insolvency is determined at the time that the 1099-C is issued, not when the short sale closes. It may be years before the 1099-C is cut and that’s when the tax will be due and is when you run the numbers to determine insolvency.

    If you know that the 1099-C will be cut for 2011, it’s too late in the year to change your withholding and make any serious difference in the amount withheld.

  4. tro says:
    if this will all occur in 2012 a lot of things can happen during that year that might make any current planning moot
    however, if you fully expect you will owe money, it probably would be wise to change your withholding to have more withheld because it is probably easier that way than making sure you lay money aside to pay what you might eventually owe

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