Wednesday, March 3, 2010
Form 1099-C Taxation of Forgiven Debt - What You Need to Know By Mike Singh
Posted by sir wil at 9:01 PM
It is said that there are two things modern man cannot escape no matter how wealthy, how handsome and how blessed he is - death and taxes. Many times has it been proven and it will be proven once again when you have to pay taxes for your forgiven debts.
You must never fall into the trap of thinking that when you have negotiated, settled and paid for a fraction of your total debt that everything is forgiven and forgotten - not for the Internal Revenue Service it is not! This is because the forgiven debt - the amount cancelled by the creditor - is considered as income for taxation purposes.
Cases of Forgiven Debts
The most common instances of forgiven debts are on credit cards and home mortgages. For credit cards, you can negotiate with the lenders to pay around 30-40 percent of the total balance payable in a process called debt relief. When you have paid your negotiated debt in full, your creditor will then fill out the IRS Form 1099-C and file it with the Internal Revenue Service.
This is also what happens when a foreclosure on your home happens and the mortgage lender sells the property for less than the amount of the loan still due and demandable. Again, the mortgage lender will file IRS Form 1099-C.
Roles of the Parties
It must be emphasized that it is the creditor that files the Form 1099-C, not the debtor. The creditor is simply notifying the Internal Revenue Service that a forgiven debt has been made. Beyond that, the creditor has no control whatsoever over the process.
The debtor, on the other hand, should acknowledge the forgiven debt on his tax return and pay taxes on the applicable amount. Otherwise, the Internal Revenue Service will send a bill for payment complete with penalties and surcharges. Yes, indeed, as sad as it is, you might just have to pay an amount greater than what you have been forgiven by the creditor in the first place.
Applicable Amount
And speaking of applicable amount, Form 1099-C is applicable to any forgiven debt amounting to $600 and above. Anything below this amount is not taxable and, hence, may not be declared in your tax return.
You may, however, avail of the insolvency exclusion clause of the law that allows for no taxes on forgiven debts in specific situations regardless of the amount thereon. It must be emphasized that the exclusion may be partial or total depending on your case. These insolvency exclusions include the following:
* Your net worth - fair market value of assets deducted by the face value of your liabilities - reveal that you are indeed insolvent and, hence, unable to pay for the tax on the forgiven debt. Said insolvency must be at the time your debt was settled, not during the time when the Internal Revenue Service is collecting taxes for the cancelled debt.
* Your debt was discharged by virtue of a bankruptcy proceeding.
* Your debt was borne of a qualified farm expense.
* Your cancelled debt can be attributed to business losses in real property
* Your debt was forgiven and explicitly considered a gift.
When it comes to debt and taxes, you should never disregard the consequences mainly because the Internal Revenue Service will be hounding your steps. Better yet, consult a lawyer and accountant on the matter.
Why pay more in taxes than you need to? Claim all of the best tax deductions.
To learn more visit http://smallbiztaxdeductions.com/
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