If you have ever settled a debt, you may have received an unwelcome surprise. Anytime you save $600 or more on a debt balance by negotiating a settlement, the debt collector is required to issue a 1099-C form and report the information to the Internal Revenue Service.
So what exactly is a 1099-C form? In short, it is a declaration that the debt collector provided you with income to pay your debt. And now Uncle Sam and possibly your own state revenue department expect you to pay taxes on that income.
As ridiculous as it sounds, it is true. Now, to be fair, we know that the debt collector never gave you a check. So how is it that you could be expected to pay taxes on it as if it were income?
Try thinking about it from a different perspective. The government can tax you for gifts received from your employer. The IRS views your forgiven debt as representing goods and services that you received that you did not have to pay for. This amounts to a gift from the creditor.
What is a 1099-C Form?
A 1099-C form is similar to a 1099-Misc from that you may have received representing untaxed income. By taking this into account, you can expect your tax liability to increase. If you are expecting a refund, your refund may be smaller.
If you have to pay, then you may find that you have to make a higher tax payment. If you have significant amounts of forgiven debt on the year, then you may need to make periodic tax payments to keep your tax liability below $1,000.
Exceptions
If you find that you owe additional taxes due to one or multiple 1099-C forms, then you might be able to receive an exclusion. Federal law does allow for an exception to be made if you can prove that you are insolvent.
One thing is certain. You should seek advice from a competent legal or tax adviser if you believe you may qualify for an exclusion.
Otherwise, you may owe hundreds or thousands in additional taxes. Remember that this extra “income” is taxed at your marginal (highest) tax rate, so it may be more than you anticipate!
Vision Credit provides extensive information on when and how to settle your debts, how to do it on your own without a debt settlement company, the pros and cons of debt settlement and alternatives to debt settlement.
Tags: 1099-C, forgiven debt
Foreclosure can also dramatically raise your tax liability. Find out how the Mortgage Forgiveness Debt Relief Act of 2007 may change this provision for foreclosed properties.
http://blog.stopccdebt.com/foreclosure-can-add-thousands-to-your-tax-bill/
[…] collection attempts and pricey legal action. Just remember that you might be on the hook for additional income taxes if you negotiate more than a $600 reduction in the […]