Christian Debt Recovery

Debt Forgiveness Form 1099

March 20th, 2011 |

Author: Gavin

The Effects of Settled Debt on Taxes: Why Knowledge is Power (and savings)

Many Americans know what it’s like to be saddled with hardship, along with the debt that often follows. In the case that a portion of that debt is forgiven via <a href=”http://www.superiordebtrelief.com/debt-settlement.aspx”>debt settlement</a> or another method, the forgiven amount may need to be reported as taxable income. For those already suffering hardship such as job loss or illness, this news can be a complete bummer. But that’s not all there is to the story. Here’s a brief run down of IRS rules for creditors and consumers who have forgiven debt.

Form 1099-C, Cancellation of Debt & Taxable Income

If an amount of $600 or greater is forgiven from a consumer’s debt load, IRS rules specify that creditors send a 1099-c form validating that amount. Tax code then stipulates that this amount is to be reported on a consumer’s tax return as taxable income.

Enter – Form 982

On the bright side, there are exceptions for when forgiven debt must be reported as taxable income. Consumers who had more debt than assets at the time of settlement may be eligible to claim insolvency. Form 982 is a great tool to determine whether or not a consumer qualifies for insolvency.

Insolvency means that the consumer does not have enough assets to dissolve or pay off the amount of debt owed. Assets include home equity, large bank accounts, savings accounts, cars, CD’s, stocks, investments, life insurance policies, and even retirement accounts. Here’s a simplified example: if a consumer owes $10,000 of credit card debt, and has $5,000 in a savings account, that consumer is insolvent by $5,000. That consumer is still in debt by $5,000. If insolvency is true at the time of debt cancellation, the amount does not have to be reported as income. Thus, if a consumer becomes solvent after a debt has been settled, but was insolvent at the time the debt was settled, that consumer may still claim insolvency on their tax return for that particular debt settlement.

Insolvency may also be declared to avoid claiming the full amount of a debt as taxable income in certain circumstances. This is possible when the amount of a consumer’s insolvency is less than the canceled portion of debt. For example, if a consumer is insolvent by $3,000 (ie, their assets are $3,000 less than the amount necessary to pay off a consumer’s current liabilities), and had $5,000 of debt forgiven, then that consumer would only claim the difference of $2,000 as taxable income.

To further research form 982 and exemptions for reporting cancelled debt as income, read IRS publication 4681 at www.irs.gov. And as always, consult a professional tax accountant in order to make decisions tailored to unique, individual situations.

Dig Deeper

When calculating finances to figure out whether or not insolvency is an option, tax payers need to double check their work, records, and even professional advice.

Because experienced accountants were initially trained to only look for bankruptcy as a sign of insolvency, they may miss modern circumstances that qualify for exemption. Taxpayers need to ask whether or not their accountant is regularly educated on new tax rules, even if those rules are very slight. This may make a world of difference on a consumer’s return.

If a taxpayer does qualify for insolvency and intends to exclude settled debt from income, Form 982 must be filed with the client’s tax return. Another detail to be aware of is that any tax return including a Form 982 must be physically mailed, and may not be submitted via electronic filing. Further, if a taxpayer does wind up having to pay taxes on settled debt, he can write off any service fees paid to a debt settlement company as a deduction from their tax return.

Also, consumers should know that 1099-c forms for all canceled debts $600 and over may be sent at the end of that tax year. If a creditor has not sent a 1099-c form in time for this year’s taxes, be aware that some state laws allow creditors up to three years to report any forgiven debt to the IRS. By keeping track of all settlements, taxpayers can anticipate any 1099-c forms that might be received by year’s end. By remaining organized and documenting all settlements, taxpayers can anticipate whether or not income needs to be set aside to pay taxes on settled debt.

Technology also makes it easier to calculate insolvency. Recent versions of do-it-yourself tax software, like Turbo Tax, often have the necessary forms for reporting debt cancellation.

The bottom line is that many who do indeed qualify for debt settlement are insolvent at the time of settlement. If they weren’t, they most likely wouldn’t have chosen the settlement option. As tax season is upon us, knowledge is power and could end up saving consumers thousands of dollars.

About the Author

Tonia’s first loves in writing are poetry, short stories, and writing about ballet and modern dance. She is currently putting her love of writing to use for Superior Debt Relief Services, a reputable debt settlement company located in Fort Collins, CO. Superior Debt Relief Services has over 10 years of experience in easing consumer debt loads by securing great settlements for those experiencing financial and other hardships.