So you have or are considering one of those debt consolidation deals, or you made a deal to reduce your debt and start making a smaller payment. You are now thinking great the amount that is forgiven can now be forgotten. Well think again! As tax time approaches those forgiven debts are about to come back to haunt you. Something these guys seem to have failed to mention to you.
You see there is a provision in the tax code that considers all that debt that was ‘forgiven’ by the collectors to now be income on your part. Those collectors will be taking a tax deduction in the amount of their loss and uncle sam dosent like to be cheated out of their money so they will now come after you for some of it. You may not be paying the money back but you will be paying a little penalty on not paying it in the form of income taxes. So if you had a loan or credit card forgiven or reduced in an amount over $600 last year you should have or expect to receive a 1099-C. SURPRISE! This is now income you have to report on your taxes.
For example if you had a $8,000 credit card debt and you negotiated it down to $2,000 to be made in easy to make smaller payments over the next few years. Well you just gained $6,000 in income for that year. All taxable by uncle sam and your state agencies.
There are some exclusions that would allow you not to report this as income but as you can see it would be hard for most of us to meet one of these.
- the debt was a nonbusiness debt and was canceled before 2007 as a result of Hurricane Katrina
- a student loan was canceled because you worked in a profession and for an employer as promised when you took out the loan
- the canceled debt would have been deductible if you had paid it
- you discharge the debt in Chapter 11 bankruptcy, or
- you were insolvent before the creditor agreed to settle or write off the debt.
What makes this especially hurtful is that it even applies to foreclosures and property repossessions. They do provide an exclusion if the money was used to purchase or improve your primary residence, but if its a second property or you took out a second to go on vacation… ouch.
Another problem is since these 1099’s are coming from credit card and loan companies you may be just throwing them out thinking its trash or harassment. Be sure you are opening these up to check! Just because you threw it out dosent make the problem go away. You are only getting part B (your copy) while the IRS is getting theirs and I bet they are not throwing theirs away.
Yes, I did get one.