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Where to start, to me, depends on which type of foreclosure reporting gets sent out. There are 2 types - 1099-A and 1099-C.
If it’s a1099-A, these imo are eyes glaze over crazy as you have to figure out if recourse/ non-recourse, capital gains exclusions, the HUD-1 form on the initial loan, FMV or loan balance as the base to use, etc. To me 1099-A need CPA or LLM/tax attorney to do. The “A” probably never ever a DIY. I’d guess at least 1k as it’s complicated
1099-C are simpler and more common. The “C’s” effectively cancel the remaining mortgage balance. It’s still income but due to the Mortgage Forgiveness Act should zero out taxes owed. But you have to file a 1040 & the Form 982 (Insolvency form) to have it in the IRS system otherwise they can do a garnishment. I’d bet that if they had a foreclosure they probably defaulted on other debt, so that they get a 1099-c from Mortgage co. and a 1099-C from VISA and another 1099–C from Discover, etc. It’s more straightforward set of #’s to use to show insolvency. TurboTax & Quickbooks tout they can do these. I know the enrolled agents who work for the year round H&R Block tax offices do them, they charge by the type of forms needed to do your taxes.
And for more fun, unless the elder can be competent and cognitive to deal with their taxes, the DPOA will have to file a IRS 2848.
If this has triggered an ineligibility by Medicaid, they may need to be notified by the IRS as to the status of the garnishment. Form 8821 can be filled out so that Medicaid can be cc’d on correspondence.
If however Medicaid is already involved and they are taking a position based on the credit report, I'm not sure how or why they would do that and the family would need to get clarification from a Medicaid case worker, their must be some waiting period or finalization that needs to be done because this is what Medicaid is for, people with no money unless the foreclosure was for other reasons.
Medicaid in my experience doesn’t care abt debts that you have. Your debts whether credit card, mortgage, car note, etc are of no importance for your eligibility. Medicaid - for financial eligibility- is all about income (like SS, pension) & assets (saving, real property, investments) and that both were properly spent down prior to the Medicaid application.
For those who have had a foreclosure or have defaulted on other debts (like credit card), they will likely get a 1099-C on the $ & associated fees & interest on the old debt. It’s considered income and fully taxable. They need to file a 104O and a 982 to try to offset the income (the amount in the 1099-C) to get themselves insolvent. If not, the IRS can attach a portion of their SS. Which is a problem for Medicaid as they are required to basically pay all of their income as their monthly copay to the NH less a small (average $60) personal needs allowance.
In theory the 982 is a DIY & IRS has an worksheet to help you. For mortgage 1099, they can use the guidelines of the Mortgage Debt relief Act of 2007 to do the 982. Personally I think your best having a tax pro do the 982. I’m not sure if the Mortgage Act was renewed for 2018.