Received a 1099-C...Now What?

Around tax time, many people receive a 1099-C form and usually do not know what to do about it.

Here is some very important information on not only why you received it, but what to do about it:

shop_now_pay_later

 

 

You need to understand:

  • Why you received the 1099-C.
  • Why you cannot ignore.
  • If you will have have to pay more tax
  • How to file with your tax return.

 

 

Anytime a creditor accepts less than the full balance due and the "forgiven" amount (the difference between the actual balance and the amount you paid) is greater than $600, the creditor most likely will report it to the IRS.

I said "most likely" because not all creditors will report a settlement/forgiveness.

If they do, then you will receive an IRS Form 1099-C that shows the creditor, the amount given and some general instructions on what to do.

Of course, typically with the IRS, the form is somewhat vague and not very clear as to what you need to do.

So, let's walk through this....

WHY DID YOU RECEIVE A 1099-C?

If you cannot make the required minimum payments on your credit cards or other unsecured debts, after a certain amount of time (usually 3-4 months) the creditor may sell or transfer the debt to a debt collection agency.

The original creditor will most likely write the balance off as a loss (to offset their tax reporting) and usually sell the debt at "pennies on the dollar".

Let's say that the debt collector/debt buyer bought your Visa Card debt of $5,000 for $500...(yep, the get these very, very cheaply!)

Now, you start getting calls and letters from the debt collector saying you owe the $5,000 to them (even thought they only paid $500).  Starting to get the point?

Oh, by-the-way, once the account has been sold or transferred from the original creditor, you can put a stop to the phone calls:

STOP Collection Calls Free Sample Letter

But, even though you stop the calls, the amount you owe still remains!

Depending on your specific circumstances you may have gone through or are going through, the debt collector/buyer may be willing to accept a SETTLEMENT.

A settlement is an agreement to accept less than the full amount to satisfy the debt, usually saving you 40%-60%.

Recent Settlements See what we have  done for our clients!

The difference between the balance owed and the amount accepted as a settlement is called a "FORGIVEN" amount by the IRS, and as I said before, you most likely will received a 1099-C form because of it.

 

YOU CANNOT IGNORE THE 1099-C!

 

We get calls from clients all the time who received the 1099-C, ignored it, filed their income taxes as usual, and then, a few months later, start getting letters from the IRS saying they own more money plus penalties and interest!

And, even though you can file an amended return in hopes of getting this taken care of, it is a lengthy, time consuming process now.

The time to deal with the 1099-C is now....not later!

 

Just because you receive a 1099-C doesn't necessarily mean that you will have to pay more tax.

 

Let's say that the Visa Card that had a balance of $5,000 and was sold to XYZ Collectors, was ultimately settled for $2,000.

Good deal!, you just saved $3,000!

Well, that's true, but, the IRS looks at it as if you had received $5,000 of goods and services, but only paid $2,000, so you had an additional $3,000 added back to your gross income for that year.

Now your total adjusted net income (the amount you will have to pay tax on after all deductions and credits are deducted from your gross income) is increased by $3,000.

If the TAX RATE (the percentage of the adjusted net income) was 20%, then you would owe an additional $3,000 x 20% or $600 more tax! (not including penalties and interest!).

But, if you had read the fine print of the 1099-C you received, it said that (paraphrasing here) that...

 you may be EXEMPT if you were INSOLVENT at the time of the FORGIVENESS.

 

What does "INSOLVENT" mean and how do you show or prove to the IRS that you were? 

 

How do you file with the IRS?

 

You must provide the IRS with a little information and the proper forms (specifically IRS Form 982).

Basically, you are going to show that at the time of forgiveness (the settlement) you had more LIABILITIES (debt owed) than your ASSETS (all equity, bank accounts, etc.)

If this is the case, then you DO NOT have to include the FORGIVEN amount as additional income and therefore, and will not have to pay any additional tax!

But, you have to provide/include the proper documentation and form with your tax return.

 

Don't be surprised if your tax-preparer doesn't know what to do with the 1099-C and don't "just pay the extra tax" as a result!!!

 

Just click below, follow the instructions:

FREE DOWNLOAD 1099-C PACKET

 

 

FREE  Debt Elimination Summary

 

 

 

 

Tags: secured credit card, 1099-C, IRS, tax on forgiveness of debt, settlement

3 End of the Year Tricks to Save Money on Taxes

save money on taxes

 

3...2...1...HAPPY NEW YEAR! 

It's that time of year again.  Time to ring in the New Year and make your resolutions.  But before the ball drops on December 31st, follow these 3 End of the Year Tricks to Save Money on Taxes!

 

 

#1: Donate to your favorite charity

Donating to charity is a great way to save money on your taxes.  When you make a donation to a qualified organization, you are eligible for a tax deduction.  If you're not sure tha an organization qualifies, use this IRS charity search tool, to look up organizations by name and location. In order to make your donation tax deductible, it has to be made before the end of the year and you must itemize deductions on your tax return.

How Do You Itemize Deductions?

Itemizing is simple and it can save you a ton of money. Each year you are allowed to claim either a standard deduction for your tax filing status or you can list out your deductions on Schedule A of IRS Form 1040.

The standard deduction in 2011 for a single taxpayer is $5,800. If you spent more than $5,800 during the year on certain types of deductible expenses—like charitable donations, mortgage interest, and a portion of your medical care—then you will save money by itemizing.

#2: Contribute the Maximum Ammount towards your Retirement Account at Work

If you have a retirement plan at work (401(k), 403(b), 457, or government Thrift Savings Plan) Find out how much you’ve contributed this year. In 2011, you can contribute up to $16,500 or $22,000 if you’re 50 or older.

Every bit that you contribute to a retirement plan on a pre-tax basis is income that you don’t pay tax on until you take a future withdrawal.

To do this, contact your benefits administrator at work to increase your final contribution for the year so you can max out the account or get as close as possible.

#3: Prepay as Many Deductible Expenses as You Can

Because you have to itemize to be eligible to claim most of available deductions, prepaying increases the likelihood that you’ll have enough to itemize in the current year.

Here are some deductible expenses you can prepay:

  • Home Mortgage Interest: Pay your January mortgage payment by December 31 so you have extra interest to deduct for this year.

  • Property Taxes: Most people receive a property tax bill in November, but it isn’t due until the following year. Paying the tax before the end of the year gives you another deduction, and maybe even an early-pay discount.

  • Student Loan Interest: Even if you don't itemize, you are allowed to deduct up to $2,500 of interest paid on a student loan. However this is subject to annual limits on your income. By prepaying your January student loan payment by December 31, you will have a little more tax savings for the current year.

You can find what additional deductible expenses you can prepay by looking at a Schedule A.  (medical costs, legal fees, and unreimbursed business expenses, etc)

By taking the time to do a little End of the Year tax planning, you can save a bundle! If you want to make sure you are saving as much as possible, consider meeting witht a tax professional.  They review your situation and make sure you are not paying any more tax than absolutely necessary!

save money on taxes

Tags: 1099-C, tax on forgiveness of debt, save money on taxes

Do I have to claim credit card debt forgiveness on my tax return?

Do I have to claim credit card debt forgiveness as taxable income because I had some debts settled last year? 

One of our clients had received a letter from the IRS regarding her inquiry as to the "taxable income" status of credit card debt forgiveness.

The IRS wrote:

"Claims of insolvency must be supported by quetiona listing of assets and liabilities at the time the debt was canceled.  You may include Form 982 or a simple cover letter claiming insolvency."

When you have a debt settled (or in IRS terms, "forgiven"), if the amount forgiven is over $600, the creditor may send that information to the IRS.

If so, you will receive a 1099-C form.  At first, it looks as if you will have to include the entire amount as taxable income, but if you read closely, their are exceptions!

  • The main exception or exclusion of the forgiveness as taxable is as the IRS letter stated above, if at the time of settlement you were basically insolvent, then the amount IS NOT INCLUDED AS TAXABLE INCOME.

IRS Form 4681 explains the "exclusions", and there are several, but the main one you should be concerned with is INSOLVENCY.

The form states, "Do not include a canceled debt in income to the extent that you wee insolvent immediately before the cancellation.  You were insolvent immediately before the cancellation to the extent that the total of all of your liabilities exceeded the FMV (Fair Market Value) of all of your assets immediately before the cancellation."

Unfortunately, many tax advisers and accountants are not aware of this exclusion and tell their clients that they must pay more taxes, when they shouldn't have too!

If you have had unsecured credit card debt settled last year, then you should:

  • Provide a simple financial profile of your assets vs. liabilities.  For most people, their liabilities are much more or at least equal to their net assets.
  • If your tax preparer does not have form IRS Form 982, click here for a copy.
  • A simple letter stating your circumstances at the time of forgiveness (hand written) may also help.

If you have had settlements prior to 2010, and you think you paid taxes when now you realize you shouldn't have, then contact your tax preparer with this information or contact the IRS yourself.

You may get back all of the extra tax you paid!

 

Tags: debt settlement, 1099-C, tax on forgiveness of debt, IRS 4681