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