Certain debt forgiveness can come with financial repercussions, especially when it comes to taxes. This cancelled debt includes debt that was significantly reduced through debt settlement negotiations or debt that was completely cancelled or forgiven by the creditor, including credit card debt.
According to the IRS, if a consumer borrows money or is obligated to pay a certain amount of money at a future date, this is considered a personal debt. Anytime that personal debt is forgiven or discharged for less than the full amount that was owed, the government considers this debt to be “canceled debt.” In a debt settlement situation where the taxpayer pays off the debt for an amount that is less than what was owed, the difference between what was paid and what was owed is considered canceled debt. In most situations, if the consumer has cancellation of debt, the amount of debt that was canceled is taxable income. This means the consumer must report that amount on his or her tax return for the year the cancellation occurred.
After a debt is cancelled, the creditor will send the consumer a Form 1099-Cancellation of Debt. At that point, the consumer is then responsible for reporting this amount on his or her tax returns for that year.
Of course, exceptions do exist to this rule. For example, if the amount of the credit card debt that was forgiven is less than $600, this does not have to be reported, and the consumer should not anticipate receiving a Form 1099 for this amount. Any forgiven debt over $600 will need to be reported to the IRS.
If, however, the consumer’s debt was discharged in a Title 11 bankruptcy, through Chapter 7 or Chapter 13 bankruptcy cases, the consumer would not be responsible for taxes on his or her credit card debt if that were cancelled in the bankruptcy discharge, among the other forms of discharged debt included.
Similarly, if the consumer works with the creditor through either a debt settlement or debt relief program, and it can be demonstrated that he or she was considered “insolvent” at the time the credit card debt was forgiven, this amount may be excluded as taxable income on his or her tax returns. Simply saying the person is insolvent, however, is not enough. To qualify, the consumer must show that the total amount of his or her debts, including any forgiven debts, was greater than the value of his or her total assets. An IRS Form 982 will need to be filed, as well, to qualify for excluding this debt due to insolvency.
If a consumer has any questions about how his or her cancelled debt will be handled, it is always recommended that he or she consult an experienced bankruptcy attorney, first to avoid any mistakes that could result in large tax penalties being owed.
If you have questions on this topic or are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.
Source:
Will You Need to Pay Taxes on That Canceled Debt? – Debt.com