Question

What are tax attributes?

Answer 1

Tax Attributes

A type of loss or tax credit that must be reduced as a result of the exclusion of debt cancellation from a taxpayer's gross income. Tax attributes are adjusted when a taxpayer declares bankruptcy. Tax attributes include net operating losses and carryovers, general business credit carryovers, alternative minimum tax credit carryovers, capital loss and foreign tax credit carryovers.

HOW IT WORKS (EXAMPLE):

John Doe qualifies for a $2,000 minimum tax credit. A tax credit is dollar-for-dollar reduction in John Doe’s tax bill.

However, John Doe also declared bankruptcy, which resulted in his credit card company discharging $1,500 of his credit card debt. Although this means that John Doe no longer owes the $1,500, his tax credit is reduced by that amount.

Other scenarios include reducing the basis (that is, the purchase price for tax purposes) by the amount of the forgiven debt, which would mean a larger taxable gain occurs when the property is sold.

The taxpayer must use IRS Form 982 to reduce his or her tax attributes in a specific order.

WHY IT MATTERS:

Generally, discharged debts do not count as taxable income for borrowers. But in order to ensure that borrowers do not dramatically benefit from debt discharges, the IRS requires that the discharged debts reduce the taxpayer’s tax attributes. Tax attributes generally only surface when a person or company is bankrupt.