If you negotiated a debt settlement in 2010 on the balance of your credit card account, you may owe taxes on the forgiven debt.
This post comes from partner site LowCards.com
If you negotiated a debt settlement in 2010 on the balance of your credit card account, you may owe taxes on the forgiven debt. The IRS views forgiven debt greater than $600 as taxable income and expects you to pay taxes on that amount.
If you have forgiven debt, your lender will send you a 1099-C form that shows the amount of the settled debt. This form is typically mailed in January. Be sure to contact your lender if you have not received this form. Your creditor files a 1099-C forms with the IRS, so the government already knows the amount of your settlement.
If you aren’t looking for a tax form, it can be easy to miss or toss out. It is a common mistake, but the consequences can be IRS fines, audits, and penalties. A missing form or “I didn’t know” will not exempt you from the tax.
“Most people don’t pay attention to the tax consequences when they are settling their debt,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. “They are just trying to figure out how to survive. The additional tax bill is usually an unwelcomed surprise.”
Filing forgiven debt can get complicated. It is a good idea to get help from a tax adviser when filing your taxes. To make filing easier, keep all paperwork and details of the conversations with the lender.
Tips for settling credit card debt
- Get professional help. Debt settlement is complicated, so it is a good idea to get assistance from a tax adviser and learn about the tax implications before finalizing your debt settlement.
- Starting in January, watch the mail for your 1099-C form. It can be easy to miss if it is mailed in a plain white envelope.
- There are exclusions that allow you to lower taxable income from canceled debts. Research the exclusions or ask your tax preparer if these apply to you.
- Make sure the information is correct. If the reported amount is wrong, contact the creditor immediately to make the corrections. They will send you a corrected 1099-C form.
Exceptions from the IRS
- Bankruptcy. Debts discharged through bankruptcy are not considered taxable income.
- Insolvency. If you are insolvent when the debt is canceled, some or all of the canceled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets. Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify.
- Non-recourse loans. A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.
- The IRS also provides assistance. If you are having difficulty resolving a tax problem through normal IRS channels, contact the Taxpayer Advocate Service. The toll free number is 877-777-4778.
- You may also qualify for free or low-cost assistance from a Low Income Taxpayer Clinic (LITC). LITCs are not part of the IRS, but they represent low-income taxpayers in tax disputes with the IRS. There is an application process with application deadlines. For information on LITCs, go to this page of the IRS website.