Internal Revenue Service United States Department of the Treasury
Level Basic Advanced Military International

Summary and Exercises

Practice Exercises

Tibbit Johnson Scenario 3

Taxpayer Documents:

Click here to see Tibbit Johnson's social security card.

Click here to review Form 13614-C, Intake/Interview Sheet

Click here to review Form 1099-R

Click here to review Form 1099-C

Interview Notes:

  • Tibbit Johnson is a retired school teacher and a widower with two adult children. His wife, Sasha, passed away in 2013. At the time of his wife's death, she was employed full-time as a bank teller.
  • He has not remarried.
  • After the death of his wife, he was struggling to make the mortgage payment on his residence on his teacher's pension alone. In November 2014, he worked out a loan modification agreement with his lender, reducing his monthly payment by $200, which allowed him to keep his home.
  • Tibbit received a Form 1099-R for his teacher's pension and his only other source of income was $7 in interest on a savings account he had with Teachers Credit Union. He did not receive a Form 1099-INT from the credit union.
  • The mortgage breakdown was:
    • Year 1993, mortgage secured to buy the house: $175,000
    • Year 2001, second mortgage loan to replace the roof and windows: $25,000
  • The home's fair market value (FMV) had fallen to $160,000 when the mortgage workout with his lender occurred. Tibbit owed $173,000 on the combined first and second mortgage loans before the mortgage workout with his lender. The lender agreed to refinance the two loans into one and reduce the mortgage principal balance to the current fair market value.
  • Tibbit received Form 1099-C reflecting $13,000 in cancellation of debt. He was solvent at the time the debt was canceled and was not in bankruptcy. The house has never been rented or used for any business purpose.
  • Tibbit and Sasha itemized on their joint 2013 return and did not receive a refund on their state return. Tibbit is wondering if he should itemize on his 2014 return.
  • Tibbit wants to know if he can still deduct the $1,200 in mortgage interest. He has no other deductible expenses.
  • He would like any refund to be direct deposited into his checking account. Routing #062005690 and Account #123967-3

For practice using the tax preparation software, complete Tibbit's tax return using the Practice Lab on Link & Learn Taxes and answer questions 1—3.

Question 1

True or False? Tibbit's debt is referred to as recourse debt.


Question 2

True or False? Tibbit's adjusted gross income is $33,007.


Question 3

How should the workout with the mortgage lender be reported on Tibbit's tax return?