Short Sale Approved in WA and further Tax Complications?

I have bought a home in Seattle WA with all the dreams on September 2009 for $266,500 and we lived happily until March 2011 but due to job i had to move to Texas. And i have approached a Realtor to put the house on sale due to my financial situations and i no longer was able to pay my Mortgage. To my surprise the... show more I have bought a home in Seattle WA with all the dreams on September 2009 for $266,500 and we lived happily until March 2011 but due to job i had to move to Texas. And i have approached a Realtor to put the house on sale due to my financial situations and i no longer was able to pay my Mortgage. To my surprise the property value in my community took a dive and my house was only valued at 200000 and my Realtor suggested that i had only two option
a. Short Sale and
b. Foreclosure

And since i don't want to walk out i made my mortgage payment for couple of months and opted for a short sale but unfortunately due to medical expenses i could not continue my mortgage payment and stopped paying my mortgage. And on the third month i got my short sale request approved with a buyer with more value than the buyer has offered and the buyer does not want to buy it so the House came to the market again.

Fortunately i got another buyer and the bank approved the short sale after 6 months on November. Now the house is in the closing process and i was worried if i have to pay the tax on the balance amount of 60000$ for the Tax year 2011 since the bank waived the balance and approved the short sale. I know for sure i have to pay back the allowance amount of 8000$ i got from the Government but not sure about the amount that was waived by the bank. The approval letter i got from the bank states

"Wells Fargo N.A Bank has approved the sale of the above referenced property This sale will result in a short payoff of the mortgage, and the mortgagors(s) acknowledge they waive any and all the rights to any escrow balance, insurance proceeds or refunds from prepaid expenses, Neither the mortgagors nor any other party may receive any sale proceeds or any funds as a result of this transaction except as noted in this demand statement. As agreed, when we receive the sale proceeds and all required documentation, we will notify the credit bureau to reflect 'Agreed settlement short of full payment' which would appear on the credit report within 60-90 days from the sale date and within 60 - 90 days from the date of notification and waive any deficiency rights if applicable"

My Questions are:

1. What are the Tax Complications i would face after this Short Sale.
2. I have paid mortgages until July and spent all the money to maintain the house including HOA, Water, Electricity and GAS and cleaning and Maintaining lawns etc. Can i itemize in this year tax return? Please advise.
3. I also have 6800$ medical expenses for this year.
4. Since i have moved to Texas from WA i have spent almost 8000$ for the moving expenses.

Appreciate your reply! Please advise.
Update: Please let me know if i will get relief from this act. H.R. 3648, the "Mortgage Forgiveness Debt Relief Act of 2007." The legislation is effective for discharges of indebtedness on or after January 1, 2007 and before January 1, 2010. The Federal Bailout Legislation H.R. 1424, passed on October 3, 2008, extended... show more Please let me know if i will get relief from this act.

H.R. 3648, the "Mortgage Forgiveness Debt Relief Act of 2007." The legislation is effective for discharges of indebtedness on or after January 1, 2007 and before January 1, 2010. The Federal Bailout Legislation H.R. 1424, passed on October 3, 2008, extended this relief through December 31, 2012.
Update 2: This house was my primary residence and i currently live in a rented apartment.
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