<p>As parents in Northern CA, we are in financial straits due to unemployment and underemployment. We are presently in the midst of a short sale on our residence. We anticipate the sale consummating in early 2012. We will have a son who will be a Senior in the Fall of 2013 and twin daughters who will be Freshman in the Fall of 2013. We anticipate employment income of roughly six figures in 2012. Due to the anticipation of cancellation of debt on the house mortgage we are anticipating another $200,000 of IRS 1099 income in 2012 and probably a $50,000 tax hit. This will render our EFC beyond any financial assistance for our children. Without financial aid they will be unable to attend college in 2013-2014. We can have the kids sit out a year until our EFC is manageable. I know many families are losing their homes and face this same FAFSA reportable income nightmare. Do you think college financial aid offices would offer any consideration for this "cancellation of mortgage debt" considering these trying times?</p>
<p>You should probably start calling schools to find out how they would handle it. But your backup plan of skipping a year sounds good.</p>
<p>It’s an interesting question as to whether FA offices might offer special consideration. Although the $200,000 arose from an unfortunate situation, it is real income. Some FA departments might not budge, comparing that situation to an equivalent six-figure family that lost $200,000 in the stock market when the same housing bubble collapsed, but received no compensation. On the other hand, they may choose to discard that income, and look only at the real take-home dollars only.</p>
<p>It’s really hard to say. Best to get on the phone, and start making appointments.</p>
<p>Cancellation of debt on the disposition of your personal residence is, in most cases, not taxable. Please consult an accountant. It should not show up as income, and you will not owe taxes on it.</p>
<p>What will your income be for 2012? If you have an idea for that, you might want to run one of the online calculators and see what your family contribution would be with that income number. You say you will have a six figure income this year…is that with the unemployment and underemployment? A six figure income would put you out of the running for state aid like the Cal Grant, I believe.</p>
<p>You might want to look for schools where your kiddos could garner significant merit aid. Do a search for threads by momfromtexas (what I learned about full ride schools…or something like that). The thread is very old but the strategies for finding significant merit aid are timeless.</p>
<p>Oh…and while the $200,000 will not be income, it WILL be an asset if the parents still have it the day they file their FAFSA.</p>
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It’s not an asset. That represents the loan that would be forgiven.</p>
<p>If your son will be a senior in Fall of 2013, then it is your 2013 income that will count on FAFSA, so the cancellation of debt in 2012 will not figure in that calculation. CSS/Profile will also primarily use 2013 income, but will ask for 2012 income, and the schools that use it might ask for tax forms. You will be able to explain the special income there. I assume you mean that your twin Ds will be freshmen in high school, right?</p>
<p>The usual caveats apply - just because you have a low EFC, that doesn’t mean anyone is going to pay your son’s tuition, so check what aid you can expect from the colleges your son applies to, and have some financial safeties.</p>
<p>IIRC, the cancellation of debt on the original mortgage does not count as income, but cancellation of debt on cash-out refinancing does.</p>
<p>Ah I understand…they will not get $200K in cash.</p>
<p>The thing the family needs to estimate for the years of their kids’ FAFSAs is their annual income for those years.</p>
<p>For students starting college in 2012, that would be the 2011 calendar/tax year.</p>
<p>For students starting college in 2013, that would be the 2012 calendar/tax year.</p>
<p>For kids starting college in 2014, that would be the 2013 calendartax year.</p>
<p>MomofJandL - 2012 income is what counts for students entering school the Fall of 2013.</p>
<p>GTAlum, I assumed the son and twin daughters are in high school, so that a senior in fall of 2013 would be a freshman in fall of 2014. If they are in college that’s a different story.</p>
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<p>Perhaps the OP can come back and clarify this statement…senior/freshmen in high school or college.</p>
<p>My understanding is that cancelled debt IS taxable.</p>
<p>You will want to file for a special circumstances review, and be prepared to provide documentation. As a former financial aid officer, I would absolutely have removed that amount from your AGI, with proper documentation (taxes paid would also be reduced - the aid officer has to actually redo your taxes — such fun!).</p>
<p>Whether debt forgiveness in general is taxable can depend on a variety of things including whether the recipient of the cancellation is insolvent before and after the forgiveness. If the taxpayer is insolvent before and after the forgiveness, then it is not taxable. If he is insolvent before but not after, then it will be partially taxable.</p>
<p>For 2007 through 2012 there are some special rules about debt cancellation relating to mortgages and foreclosures on the principal residence.</p>
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<p>To me, it sounds as if the son will be a college senior and the younger ones college freshmen. OP, based on what others have told you here, I would definitely seek professional advice on the tax ramifications prior to completing the short sale. You might also run this by your son’s FA office and see what their advice is. Their decision on professional judgement may or may not be the same as what your daughters’ schools decide. Having to go through three appeals doesn’t sound like much fun but there may be no getting around it unless they’re willing to take a gap year. Good luck!</p>
<p>Sorry to be jumping back into the thread so late. My son will be a college Senior and twin daughters will be college Freshman in the Fall of 2013. Fall 2013 entrance will be based on 2012 IRS income figures which is the year cancellation of debt income will be recognized. Based on the insolvency test we will be able to reduce the income slightly, but cancelled debt should exceed $200K. I was encouraged to hear from Kelsmom (the former financial aid officer) that cancelled debt income would be backed out of AGI. I will need to clear this FAFSA issue with all Financial Aid Officers to get a true read. Thank you all for your input.</p>
<p>Further clarification. Cancellation of debt was debt exclusive of the original mortgage and not used on house improvements, so it is taxable and I will receive a 1099 from IRS. Have discussed with CPA and tax attorney. Thanks again for the great and helpful input!</p>
<p>For the students who are going to be college freshmen…PLEASE look for schools where they would garner significant merit aid. The old (it’s very old) thread by momfromtexas has excellent strategies for doing so. This could very much help the financial landscape in your home.</p>
<p>It sounds like you have gotten some excellent advice from people who are helping you with this process. I’m sorry your family has to be dealing with this…but hope too that you all land on your feet in the end.</p>
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<p>I think your attorny and cpa are all wet, they should be fired. First of all IRS Will NEVER send you a 1099 your bank will and secondly,</p>
<p>Have you seen this?</p>
<p>[The</a> Mortgage Forgiveness Debt Relief Act and Debt Cancellation](<a href=“http://www.irs.gov/individuals/article/0,,id=179414,00.html]The”>http://www.irs.gov/individuals/article/0,,id=179414,00.html)</p>
<p>If this is your Principal Residence, read the IRS article regarding the 2007 act.</p>
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<p>edit, IRS does send out 1099’s, but only to their contractors who work for IRS, not for debt cancellation, the lender will send you the 1099 for debt cancellation.</p>
<p>The 2007 relief act is only for Primary Residence, if the house is an investment property, all bets are off.</p>
<p>art - It’s not so simple; there are exclusions, even for primary residence. As I read this, it was a second mortgage that was used for non-house expenses - that falls under the exclusions.</p>
<p>Cancellation of debt was debt exclusive of the original mortgage and not used on house improvements, so it is taxable and I will receive a 1099 from IRS.</p>
<p>My understanding of the mortgage forgiveness debt relief is the same as the OP and misterK. If the funds were not used for home improvement or as part of the original purchase of the property, the debt relief is taxable income.</p>