How to File IRS Form 982 After Receiving a 1099C

When a debt is settled (IRS says, "forgiven") for more than $600, you may receive a form 1099C that seems to say that you are going to have to pay more tax!  Here's what you need to do to have the "forgiveness" excluded as additional income:

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(Let me start out by stating that I am not an accountant or attorney.  I have been helping people deal with creditors, debt collectors, and attorneys for the creditors for many years and have tried to provide assistance to them or their tax preparers in how to deal with a 1099-C form.  So, please consult yours!)

Now, in this article/blog, I'm talking about dealing with a 1099-C that you may (or may not) receive after an unsecured debt such as credit cards, personal bank loans, medical bills, etc. has been settled for less than the balance.

By the way, don't be surprised that your tax preparer or accountant is not quite sure what to do with the 1099-C!  Or, be careful if they just say that you have to include the settled/forgiven amount as additional taxable income without seeing if it can be excluded!!!!

ALSO, DO NOT IGNORE THE 1099-C, even if you receive it AFTER you have filed!

 If this happens, you may have to file an amended form.  You accountant or tax preparer will help.

Ok, so you have received the 1099 C.... NOW WHAT?

To help you, here's an actual copy of a 1099C one of my client's received for a debt we helped settled in 2015.  (The 2016 1099C's are not out yet, but will be the same.)

Click on the form below and print a copy so you can follow:

1099C Form 2015

It shows...

  • The name of the creditor... Capital One
  • Client's personal information (I've blacked out for privacy of course)
  • Date of the settlement... 1/3/15
  • Amount of the canceled debt (amount forgiven)    $1,463.68
  • Debt Description... Credit Cards and Loans
  • 1099-C Instructions for Debtor

The actual balance at the time of settlement was $ 3,440 and the total settlement was for $1,500.  Even though this was a reduction of $1,940, the creditor has excluded the added interest and fees in reporting the settlement to the IRS.

Look carefully at the bottom of the form and you will see,

"However, according to IRS Pub. 4681, you may not have to include all of the canceled debt in your income.  There are exceptions and exclusions, such as bankruptcy and insolvency."

Do you see the word, "INSOLVENCY"?  This is the key to the whole matter.

It means that if at the time the settlement was completed, if your liabilites (all outstanding debts including the one that was settled) were greater than all of your assets (equity in your home, car, cash, bank accounts, etc.), then, according to the IRS, you were INSOLVENT.

So how do you show/prove to the IRS that you were insolvent at the time of the settlement?

You are going to file IRS Form 982 along with your tax return. 

But first, you are going to have to do a little "homework"... relax, it's easy...

Although it is not necessary, I advise my clients to write out a BRIEF, LEGIBLE explanation of their situation at the time of the settlement.  Again, you don't have to use word processing, but make sure you write very clearly.  Something like:

John Smith  SS # 123-45-6789  234 Main St.  Big City, OR 97033

I lost my job in August of 2014 and did not find employment until a year later.  My wife was also very ill at that time. 

We used credit cards to try and make ends meet, but ultimately were unable to keep up with the payments.  Rather than file for bankruptcy, we tried to negotiate with our creditors for a reduction of the balance.

As you can see from the Assets vs. Liabilities worksheet I've attached, we were in real financial trouble and/or insolvent.

Next, complete a brief worksheet listing your Assets vs. your Liabilities:

Example:

Assets:                                                            Liabilities:

FMV of home         $ 225,000                          Mortgage   $190,000   2nd   $20,000

FMV of car             $    5,000                           Student loans         $27,000

Personal Items       $    5,000                           Medical Bills           $  4,000

                                                                     Credit Cards           $ 31,000

Total Assets:        $ 235,000                          Total Liabilities:       $  272,000

                                  Net Worth:     negative  -$37,000

Now you are going to fill out IRS Form 982 (really, really simple!!!)

For credit card and other unsecured debts, you only have to deal with Part I.

  • Check the box on 1,a
  • Fill in the amount of forgiveness from 1099C on line 2  ( 1463.68 )

That's it!  Nothing to it!

Now, MAKE A COPY OF EVERYTHING....

  • The 1099-C
  • Your brief explanation of financial hardship
  • Your Assets vs. Liabilities worksheet showing Insolvency
  • Completed IRS form 982

Finally...

Attach/include, all of the above with your tax return.

If you need more help, click below:

FREE DOWNLOAD 1099-C PACKET

 

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Tags: debt settlement, Bankruptcy, credit card, 1099-C, IRS Form 982, IRS Form 4681

What is a 1099-C and What to do About it!

If a creditor settled or wrote off a debt for you in 2015, you may get a 1099-C.  Here's what you can do to avoid paying any additional tax...

Debt settlement is an option that we use and you can use to help avoid bankruptcy and become free from the burden of too much debt.

Basically, is a debt settlement, the creditor or in most cases a debt collector who has purchased the debt agrees to accept an amount far less than the actual current balance.

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If the "forgiven" amount is greater than $600, then the creditor or debt collector may report it to the IRS.  They don't do it in every case, but you need to be aware of what to do about it if it happens to you!

There a couple of different looking 1099-C forms.  Here is an actual form one of our clients received and I'll walk you through the process of how to file the proper forms to exempt the settlement/forgiveness when you file your taxes.

Here is an actual 1099-C one of our clients received.  Click to view:

1099-C

The actual balance at the time of the settlement was $3,041 and the settlement was for $788, saving this client $2,253!

The 1099-C reflected this and you can see that in box 2, the amount is being reported as "Amount of debt canceled".

If this client did not file the proper forms with her 2014 taxes, she would have had an additional $2,253 added in as additional income and based on her 30% tax bracket (average net federal), she would have to pay an additional $676 of tax!

Here's what she did:

According to IRS publication 4681, she needed to prove that "at the time of forgiveness (settlement), she was INSOLVENT.

All she (and you) needed to do was to list all of her assets vs. liabilities to see where she stood.

This doesn't have to be a "fancy" spreadsheet or anything, but just write down (again, at the time of the settlement/forgiveness) your assets/equity on one side and your liabilities/debts on the other.

Something like this:

                      Assets:                                           Liabilities:                                  

         Home value:          $  0 (she rents)          Credit Cards total (including this debt):    $15,000

         Auto value today:   $ 5,000                      Auto loan:           $1,000                            

         Savings:                 $    250                      Student loan:      $ 10,000

         Personal assets:    $ 2,500                      Medical bills:       $     500

         Total Assets:          $ 7,750                      Total liabilities:     $ 26,500

It is clear that her Liabilities were greater than her Assets, therefore the amount forgiven should be exempt from taxation. 

NEXT:

She downloaded IRS Form 982 and followed the simple instructions we gave her:

In Part 1, on line 1a, she marked the box with an "X".

In the same Part 1, on line 2, she wrote in the amount that was forgiven, $ 2,253.

That's all on the Form 982. 

NEXT.....

She could have just included that with her tax return and in most cases, that would have been sufficient.  But, I recommend writing a brief, legible explanation of what caused your situation, etc.  Again....very brief neatly written (doesn't have to be typed).

Something like this:

In 2014, I was laid off from my job of 15 years!  As I looked for work, I had to rely on credit to get by.  When it got to the point that I just couldn't keep up with the payments, I considered bankruptcy. 

Fortunately, the bankruptcy attorney I went to see referred me to a Debt Management Company who helped me pay off and/or settle my debts.

 

Finally....

You have:

  • Asset vs. Liabilities worksheet
  • IRS Form 982 completed (yep, just two boxes)
  • Brief, legible handwritten explanation of your circumstances

 

Now....

  • Make a copy of these along with your tax return for your files.
  • Mail your tax return along with the documents above.
  • That's it!

 

If you would like more information or need any help, click below:

FREE DOWNLOAD 1099-C PACKET

 

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Tags: debt collector, credit card, 1099-C, debts, additional taxes

Tax Time, Debt Settlement, 1099-C

If you had a debt settled or forgiven last year for more than $600, most likely you will receive a 1099-C.  Do you have to pay more taxes?  Here's what you need to know:

1040_Form

If a creditor is willing to accept less than the full balance due (called debt settlement), the IRS calls this a "forgiveness" of the debt. If this amount is more than $600, the creditor or debt collector who owns the debt must report the "forgiveness" to the IRS.

Then, the IRS will send you a 1099-C Form.  This form states that a certain amount was forgiven by the creditor and that you must include the forgiven amount as "other income" when you file your taxes.

Fortunately, you may be able to EXCLUDE this amount of forgiveness if you meet a simple test.  According to IRS Publication 4681, you may be deemed as INSOLVENT and do not have to add the forgiven debt as additional taxable income.  At the bottom of page 5, under the paragraph "INSOLVENCY", it states:

"Do not include a canceled debt in income to the extent that you were insolvent immediately before the cancellation.  You were insolvent immediately before the cancellation to the extent that the total of all your liabilities was more than the FMV(Fair Market Value) of all of your assets immediately before the cancellation.  For the purpose of determining insolvency, assets include the value of everything you own..."

So here is what you do:

Take a sheet of paper and on one side, list all of your ASSETS:

  • FMV of your home (realistic price you should get if you sold your home)
  • Savings accounts
  • Net FMV of any automobiles
  • Net FMV of anything of real value (collectibles, Quad runners, boats, etc.)

One the other side of the paper, list all of your LIABILITIES:

  • First mortgage balance
  • Any 2nd mortgage balance
  • Total amount of all credit card debt (including the balance of this forgiven debt!)
  • All medical bill debt
  • All Store Card debt (Kohls, Sears, Home Depot, etc.)
  • Any State or Federal Taxes you are paying back
  • Student Loans
  • Personal Loans
  • Auto Loans

Add up all of your ASSETS and subtract all of you LIABILITIES.  For example:

                                     Total Assets          $236,000

                                     Total Liabilities      ($278,000)

                                     Net Worth            - $ 42,000

At the time of the "forgiveness" or settlement, you were INSOLVENT and therefore, you DO NOT have to include that amount as additional or "other income"!

                                 OK....Now What????

When you prepare (or have someone else prepare) your taxes, you will need to include

  • IRS Form 982
  •  A copy of the 1099-C
  • A copy of your Assets vs. Liabilities worksheet (can be on yellow pad paper!).

I've been helping people deal with debt issues for over 12 years and have only had a couple of people have to include any "forgiven" amount as additional income! 

Don't be surprised if your CPA, tax preparer (especially the H&R Block types) or accountant does not really understand how to deal with a 1099-C. 

I've assisted dozens over the years and have put together a 1099-C instruction packet that you will find very helpful!

FREE DOWNLOAD 1099-C PACKET

 

 Photo by:  https://www.flickr.com/photos/aidanmorgan/

 

                   
                   
                   
                   
                   

 

 

 

Tags: 1099-C

What to do if you receive a 1099-C after a Settlement?

If you have had a debt settled for less than the total balance, you may receive a 1099-C.  You may or may not have to pay any additional tax.

Get out of debtWhen you settle a debt for less than the full balance due, and this is for $600 or more, the creditor or debt collector may report this to the Internal Revenue Service.  I say "may report" because they don't always report a settled or "forgiven" debt. 

Over the past decade that we have been helping people get out of debt, it seems that in the last year or so, more and more creditors and/or debt collectors are reporting settled or forgiven debt.

I have to start out by stating that I am not a CPA or licensed professional tax consultant, so any advice here should only be used to help point you in the right direction.  If you do receive a 1099-C, please seek the help of a professional tax consultant!

So what should you do if you receive a 1099-C?

                             DON'T IGNORE IT!!!!

Let's say that you had a Credit Card that had a balance of $10,000 and because of circumstances beyond your control, you just couldn't make the minimum payments.

Most likely, this account was sent to a collection agency after the original creditor made numerous attempts, such as annoying and often harassing phone calls and many collection letters.

STOP Collection Calls Free Sample Letter

The debt collector may have sent you an offer to settle for less than the full amount due or perhaps you or a Debt Settlement Company were able to negotiate a good settlement.

Using our $10,000 example, let's say that the settlement was for $4,000.  The debt collector was willing to "forgive" (in IRS lingo) $6,000.  The debt collector reports this to the IRS in order to write that amount off as a loss and you are sent an IRS form 1099-C.

At first glance, it may look like you owe $6,000 of additional tax, but this is not so!

You will need to file the proper forms with your tax return to have the settled or forgiven amount EXCLUDED from being added back in as additional taxable income.

As usual, the IRS seems to have complicated the process, but in reality, it is not that difficult to file properly.

The basic and most important question that you must answer and prove to the IRS is:

"At the time of the settlement or forgiveness of the debt, were you insolvent?"

What is "insolvent"?

If, AT THE TIME OF THE SETTLEMENT, you had more debt than you had in assets, then you were insolvent. (Sounds terrible, but that's just their terminology.)

So, how do you find out or prove if you were insolvent or not?

It is really not difficult.  Take a piece of paper (or use your computer if you want) and one side list all of your assets, such as:

 

  • Net equity of your home (Current value less amount you owe = net equity)
  • Cash or money in the bank
  • Net DEPRECIATED value of things such as furniture, appliances, tools, etc.  remember, even though you paid $2,000 for that refrigerator a few years ago, today it probably would sell for only $200-$300!
  • Net value of your autos, boats, campers, etc.  Same thing, NET, DEPRECIATED VALUE!

Total all of these up.

On the other side of your sheet, list all of your DEBTS OR LIABILITIES, such as:

Since you've used the NET VALUE (Depreciated Value less Balance still due) on the ASSET SIDE, were probably talking about:

  • Credit cards
  • Store cards
  • Student loans
  • Medical Bills
  • Personal loans
  • Possibly Home Equity loan or 2nd you forgot to list before!

Add all of these up.

Subtract the total of all of your LIABILITIES (DEBTS) from your NET ASSETS. Which is greater?  If your Liabilities are greater than your Net Assets, you were insolvent at the time of settlement and therefore, the amount forgiven WILL NOT be included as taxable income.

The next part seems a little difficult, but it's not.

You are going to complete:

  • IRS Form 982
  • A copy of your ASSETS VS. LIABILITIES worksheet
  • A copy of the 1099-C

You are going include these along with your normal tax return.  By the way, don't be surprised if your tax preparer seems a little confused as to how to handle a 1099-C.  I've had clients pay tax that they didn't need to because the tax preparer didn't file the proper forms.

We have prepared a FREE 1099-C PACKET that you can download and use. 

It includes:

  • Instructions
  • Examples
  • IRS Forms

Get yours by clicking on the button below:

FREE DOWNLOAD 1099-C PACKET

What happens if your Assets were greater than your Liabilities?

You are going to need the help of a qualified, tax consultant or preparer.  You still should be able to exclude a large percentage of the forgiven debt, but there may be other ramifications, so I advise you to get help.

Photo credit: www.lendingmemo.com

 

 

 

 

 



 

 

 

 


Tags: credit card debt, debt settlement, 1099-C, IRS Form 982, credit card debt relief oregon, credit card debt help portland or

How to Avoid Additional Tax After Receiving a 1099-C

If you had a debt settled or "forgiven" in IRS lingo, and it was for more that $600, you most likely will receive a 1099-C.  But, you may not be required to pay additional tax on the forgiven amount, but YOU MUST FILE THE CORRECT FORMS AND DOCUMENTATION

We have prepared a simple, easy-to-use instruction packet for you. 

Get yours now:

FREE DOWNLOAD 1099-C PACKET

Receiving an IRS Form 1099-C is a little scary, but if you look closely at the form, you will see something like this:

"...do not include canceled debts in your income to the extent you were insolvent immediately before the cancellation of the debt.  If you exclude a canceled debt from your income, file Form 982."

OK, now what?

First, at the time of settlement (most likely last year), were you INSOLVENT?

According to the IRS, "insolvent" means that your debts (all liabilities, not just this settled debt) were greater than your assets (net worth).

You'll need a simple, Basic Financial Worksheet:

Budget Worksheet FREE Download here!

 

You will list all of your assets, net value of your home, autos, etc.  Most people who have have debts settled would have had little if any equity in their home and/or auto. 

You most likely have little or no savings, hence the financial hardship that helped lead to using DEBT SETTLEMENT to eliminate your debts!

Once you have completed the Financial Worksheet, if your LIABILITES were greater than your ASSETS at the time of the settlement, then you were 'INSOLVENT".

NEXT...COMPLETE IRS FORM 982

We have included Form 982 with the FREE 1099-C PACKET.  If you haven't requested the FREE DOWNLOAD, click on the button above.

Follow the instructions to compete the Form 982. It's so simple.

It is a good idea to include a short explanation of your financial situation.

Just a brief note (can be handwritten, but make it legible).

So now you should have completed:

  • Financial Worksheet showing your were insolvent at the time of the debt forgiveness
  • Form 982
  • Brief note of your financial circumstances at the time

Make a copy for your records and then send all of the above along with your tax return to the  IRS.  You should send via Priority Mail so that you will have proof that the IRS received it, but don't ask for a signature, as this may delay the process.  You can track delivery online.

Don't be surprised if your accountant and/or tax preparer is not aware or does not know how to complete the Form 982.  Just download and print the FREE 1099-C Packet for them.

If you have alreadly filed your tax return and before you received the 1099-C, you will need to file an amended form along with the 982 and other documents.  You should probably seek the help of a qualified tax specialist for this.

Hope this helps! 





Tags: insolvent, form 982, 1099-C, IRS Form 982, IRS, additional taxes

What To Do If You Receive a 1099-C

what to do if you receive a 1099-C

Have you had a debt settled for less than you owe?  If so, chances are pretty good that you also received a 1099-C for the amount of the "forgiven" debt amount.  WHAT?  How can that be possible? 

Unfortunately, if you settle your debts, the forgiven amount is considered taxable income.  However, you don't necessarily have to included it as taxable income.  Read on to hear Bob's story and how he was able to avoid paying taxes on his forgiven debt.

How to avoid paying taxes if you receive a 1099-C for FORGIVEN DEBT

Bob lost his job and started using several credit cards to make ends meet. He was paying for groceries, gas, and even had to take a cash advance once in a while to survive.Bob had every intention of paying off the cards, but due to our country's severe economic downturn, he could not find a job.

After about a year or so, he had added another $10,000 to his cards, making the total of all his credit cards to be about $22,000!The minimum payments on all of them totaled a little over $500 per month and he just couldn't meet his obligation.  After 3-4 months of non payment, most of his cards went into collections, debt collectors started

Bob had heard about DEBT SETTLEMENT and DEBT MANAGEMENT, but didn't know if he qualified.

After a FREE COUNSULING SESSION, it was clear that he could not qualify for the Debt Management Program and therefore chose to enroll in the Debt Settlement Program.

Let's see what happened during the Debt Settlement Program:

After searching the net and talking with several companies, Bob had chosen a reputable Debt Settlement Company to help him settle his debts.

His total debt was settled at an average of 40% of what he owed, so his creditors FORGAVE about $13,000 of debt.

Because the amount of the forgiven debt was over $600, Bob's creditor reported the settlement to the IRS and mailed him a 1099-C.  The 1099-C basically said that $13,000 had been forgiven and he needed to report that amount as additional income for the taxt year the forgiveness was granted.

But his Debt Settlement Company helped him understand that he was not going to be liable for the additional income and resulting tax on that income.

They provided him with a information about how to file IRS Form 982 and the other documents he needed to provide with his taxes.

IRS Form 4681, says that if, at the time of forgiveness, you were INSOLVENT (meaning your liabilities were greater than your assets), then the forgiven amount DID NOT HAVE TO BE INCLUDED as additional income!

Since Bob had completed an Asset vs. Liabilities worksheet, provided by his Debt Settlement Company, he was able to completely avoid any additional tax on the settlement or "forgiven" debt shown on the 1099-C!

If you have received a 1099-C and need help, we can help, please let us know!

 


Tags: debt collection, credit card debt, debt settlement, debt settlement vs bankruptcy, debt settlement in oregon, 1099-C, IRS Form 982, IRS Form 4681, debt management, additional taxes, IRS 4681

Have you received a 1099-C due to Cancellation of Debt?

1099C and cancelation of debt

If you have settled a debt or had a debt, you may receive an IRS Form 1099-C.  This doesn't necessarily mean that you will have to pay additional tax on the amount "forgiven".  Here's what you need to do:

The 1099-C has Instructions for Debtor:

You received this form because a Federal Government agency or an applicable financial entity (a lender) has discharged (canceled or forgiven) a debt you owed, or because an identifiable event has occurred that either is or is deemed to be a discharge of a debt of $600 or more.  If a creditor has discharged a debt you owed, you are required to include the discharged amount in your income, even if it is less that $600, on the "Other income" line on your Form 1040.

However, YOU MAY NOT HAVE TO INCLUDE ALL OF THE CANCELED DEBT IN YOUR INCOME (capitalization mine!).  There are EXCEPTIONS AND EXCLUSIONS, such as BANKRUPTCY or INSOLVENCY see Pub. 4681...for more details.

Most people who have had debts settled (forgiven) have gone through a very hard time, financially. And, most people who have had debts settled would fall into the catagory of INSOLVENCY, according to the IRS and several publications.

The bottom line is, if AT THE TIME OF SETTLEMENT your liabilites were greater than your assets, you were insolvent and therefore the amount of debt forgiven would be excluded.

We have helped hunderds of our clients to become DEBT FREE through DEBT SETTLEMENT, but we also have assisted them in AVOIDING (or paying very little) ADDITIONAL TAX after receiving a 1099-C.

We have put together a complete 1099-C Kit that will show you (and/or your tax preparer) how to fill out and file the proper forms.

CLICK HERE to get you FREE 1099-C KIT

Tags: debt forgiveness, 1099-C, IRS Form 982, additional taxes, IRS 4681

I Received a 1099-C, Now What?

received a 1099CIf you have received a 1099-C, DON'T PAY THE ADDITIONAL TAX until you know your rights!

If you or a debt settlement company negotiated a debt for less than the balance due and if that amount was more than $600, you most likely will receive a 1099-C.

NOW WHAT?

The 1099-C looks like you will have to pay 100% of the settled or forgiven amount, but this is simply NOT TRUE!

However, a lot of tax preparers and even CPA's don't understand this law and how exemptions are calculated.

According to IRS Form 4681, there are several exemptions to including forgiven amounts back into taxable income. On page 4 of IRS Form 4681, there is an explanation of "INSOLVENCY". 

Basically the rule states:

If at the time of the settlement or forgiveness you were INSOLVENT, then the amount of the forgiveness IS NOT INCLUDED as additional taxable income.

How do you determine if you were insolvent?

At the time of the settlement, you need to show that your liabilities were only equal to or greater than your assets.

You need to complete a basic budget showing all of your income, outgo, and assets:

  • Equity in your home
  • Net value of your automobile(s), boat, etc.
  • Net value of jewelery, stocks, bonds, etc.
  • Savings or investment accounts
  • Net furniture value, coin collections, etc.

For most people who have negotiated a settlement of their credit card or cards, they usually do not have any real assets and therefore the amount forgiven is not included as additional taxable income.

You will need to complete IRS Form 982. You will check a couple of boxes and sign, and along with the Budget Worksheet, turn in with the 1099-C and your normal tax return.

Once again, don't be surprised if your tax preparer or accountant is not really up on this procedure! You might want to download IRS 4681 for them to review.

If you have already filed your taxes for the last two years and if you paid additional tax on the additional income added back into your adjusted gross income, you should file an AMENDED RETURN.

If you are still unsure of what or how to deal with a 1099-C, please let us help.

We have helped dozens of tax preparers and accountants deal with the 1099-C issue and would be glad to assist.

Got Questions? We've got ANSWERS!

877-492-4109

received a 1099C

 

Tags: debt forgiveness, debt settlement in oregon, 1099-C, IRS Form 982, IRS Form 4681

Do You Have to Pay Tax After Settlement?

do i have to pay tax after settlementA client called us the other day and asked, "Do you have to pay tax after settlement?"

In most cases, the answer is NO.

When you negotiate a settlement on a debt you owe, let's say a credit card with a $10,000 balance is settled for $4,000 (yes it is very possible!), the amount that is FORGIVEN may be added back into your taxable income for that year.

At the end of the year, you will receive a 1099-C in the mail that states that the creditor has reported the $6000 of forgiven debt to the IRS (any amount forgiven over $600 may be subject to IRS reporting).

What do you do when you receive a 1099-C?

First, if your accountant or tax preparer tells you that you will have to pay tax on that amount, you probably need to find a new accountant!

Why?  It has been my experience that most accountants and tax preparers are not aware or experienced in how to treat 1099-C for settlements or forgiveness.

IRS Form 4681 explains that certain amounts of "forgiven debt" may be excluded from taxable income.  Basically, if AT THE TIME OF FORGIVENESS, you were INSOLVENT (your debts were greater than your assets), then the forgiven amount IS NOT included as taxable income.

List all of your assets:

  • Any equity you have in your home
  • Net or depreciated value of your cars, boat, etc.
  • Net value of your jewelery, stocks, bonds, etc.
  • Cash

Now list all of your debts:

  • Mortgage (First and Second) on your home
  • Lines of credit
  • student loans
  • credit cards
  • medical bills
  • personal loans

Subtract the DEBTS YOU OWE from your ASSETS.  If the number is negative, then you are "insolvent" according to the IRS. Complete IRS Form 982 and check the appropriate boxes to show that this amount should be excluded.

The moral of this story, don't think that just because your accountant or anyone else tells you that you must automatically pay tax after settlement, that it is always true.

 

photo by: Alan Cleaver

Tags: insolvent, how to avoid paying tax on forgiven debt, debt settlement, 1099-C

How to Avoid paying Taxes after receiving a 1099-C

avoid paying taxes after recieving a 1099cIf you have had a debt "forgiven", and receive a 1099-C, how do you avoid paying taxes?

Any amount of "forgiveness" over $600 can be reported to the IRS and if so, then you would receive a 1099-C form.  The IRS says that any debt that is settled for less than the full balance must be included back into your income and you must pay the resulting taxes!

Instructions from the IRS can be found in IRS 4681.

In the instructions, you will find an explanation of "INSOLVENCY".  Of course, when reading anything from the IRS, it is not very easy to understand or interpret.

Basically, the information states that if at the time of the forgiveness, you were INSOLVENT, then the amount of forgiveness IS NOT INCLUDED as additional income and therefore you would not pay any additional tax.

Let's look at an example:

After many harassing phone calls from your creditor, you are able to settle your account for less than the balance.  When it came time to file your taxes, you receive a 1099-C which would lists the debt, the debtor and the amount that was "forgiven".

What do you do now that you have received a 1099-C?

First you need to determine if you were INSOLVENT at the time the debt was forgiven. To determine if you were insolvent :

1.  List all of you assets (things you own that has positive equity):

  • Equity of your home
  • Net (depreciated) value of your cars, boat, etc.
  • Net value of jewelery, stocks, bonds, etc.
  • Savings or investment accounts
  • Cash in the bank

2.  List all of the debt you had at the time of forgiveness:

  • Mortgage (1st and 2nd)
  • Auto, boat or other loans
  • Credit card debt
  • Medical debt
  • Personal loans to...

3.  Now subtract your LIABILITIES (that's all the debt) from your ASSETS.

Is the result a NEGATIVE number?  If so, you WERE INSOLVENT!

When filing you tax return, you will need to complete IRS form 982 and submit with your tax return.  Most accountants and/or tax preparers are not aware of the exceptions to paying tax on "forgiven" debt, so you need to be very careful.

Although we are not attorneys nor tax accountants, we can help guide you through the process.

If you would like a FREE CONSULTATION, just let us know.

BOTTOM LINE...DON'T PAY ANY MORE TAX THAN YOU ARE LEGALLY REQUIRED...IT'S YOUR MONEY AFTER ALL!!!

 

 photo by: MoneyBlogNewz

Tags: how to avoid paying tax on forgiven debt, how to stop collection calls, 1099-C, additional taxes