March 04, 2010 - William L. Henry IV
It seems that everyone has debt. Credit card debt, debt from foreclosures, short sales, and medical debt. For many people, giant bills seem to pile up adding more debt every month.
You may be hoping that the bank or credit card company will write off the debt. Or you may be trying to use a debt settlement company or attempting to settle the debt on your own for less than the full balance due. What seems like a good idea and a relief if you are successful can end up costing you at tax time.
If someone loans you money, whether a mortgage or you make a charge on your credit card, you get money to buy something--groceries, a home, a tv, etc. Because you must pay back the money, the IRS does not consider the amount that was loaned to you income.
But what happens when the bank or credit card company settles for less than the amount owed? The answer: taxable income. So, for example, if you owe your credit card company $10,000 and they accept $4,000 as payment in full, you have received $6,000 that you can be taxed on. This phantom income is called cancellation of indebtedness income.
If you debt is reduced or eliminated you will typically receive a 1099-C, Cancellation of Debt, at the end of the year. You are required to report that amount as income (the IRS receives an informational return, so they know you received the income). You will then pay tax on that that income.
If you think you have received cancellation of indebtedness income here is what you can do about it:
- If the debt canceled or forgiven is a mortgage secured on your "principal residence," and the debt was forgiven between 2007 to 2012, there is no cancellation of indebtedness income.
- If you are "insolvent" under the tax laws and IRS standards you do not have to pay tax on cancellation of indebtedness income.
- If you file bankruptcy and the debt is discharged during the bankruptcy you do not have to pay tax on the the cancellation of indebtedness income.
Robinson & Henry has offices in Denver, Colorado Springs, and Castle Rock. Our bankruptcy attorneys and IRS attorneys work closely together to solve your IRS cancellation of indebtedness income or other debt problems. Contact one of our lawyers at (303) 688-0944 for a free consultation for debt matters. You may also schedule your appointment online by clicking here.