If you have recently gone into foreclosure or completed a short-sale, you could owe a big chunk of change to the IRS in your forgiven debt. However, you can avoid paying these taxes right now while doing a Home Affordable Modification Program (HAMP).
As part of HAMP, your principal balance will be reduced for over three years, as long as you make your payments on time. Keep in mind that if the IRS makes changes to this program in 2014 you might owe tax on that principal reduction.
You can avoid paying these potential taxes by claiming all principal reduction on your 2013 tax bill rather than spreading it out over three years. That way, if the tax laws do change, you'll be protected.
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