As we’re all aware, this decade’s Great Recession has dealt, and continues to deal, a significant blow to the budgets of many American families, leaving millions in debt, out of work, underwater in their mortgages, and looking for any means necessary to get back on a financially-healthy course. Now, we’re finding that tax time 2010 is also yielding it’s own unique set of challenges for some cash-strapped citizens who may have had some of their debt forgiven or settled a debt for less than the full amount in 2009.
Have you had some of your considerable student loans forgiven? Have you recently reached a debt settlement with your credit card company? Have you had a car loan settled or the debt forgiven? Well, what might have been great news then means tough economic times this time of year as that amount is now considered income by the IRS. And if you're not declaring bankruptcy or if your personal liabilities do not outweigh your assets, then you will have to pay taxes on the amount of debt that was forgiven.
What might this rule mean for you and your budget as tax season closes in? For example, if you had $600 of debt forgiven on a credit card balance and you're in a 10% tax bracket; that’s an additional $60; for a 15% tax bracket, your tax obligation would increase by $90; and so on and so on. Rest assured your creditors and other debt collectors will indeed file paperwork with the IRS if they have reduced your balance by $600 or more. And so should you. But it's up to you to include this on your personal income tax return. Play it safe and report any amount you're forgiven.
Reporting is the easy part. Your creditors and debt collectors will provide you with a 1099-C, or a cancellation of debt form. The filing of this form proves that your creditor reported your forgiven debt and that your debt was actually settled. As such, it’s a must to include with your own tax filing. If there is any dispute about the amount reported on the form, contact the creditor or debt collector immediately to resolve the matter. The more of your debt that is settled, the more you’re taxed, so make sure the 1099-C form is accurate and ask for a corrected 1099-C form to include in your tax return if there are discrepancies.
If you own a home and had debt forgiven, the news is a bit better. Since many homeowners are just struggling to stay current with their mortgages, this tax season (and until 2012), you do not have to report debt forgiveness for a home loan as long as it amounted to less than $2 million on your principal residence. Remember, this reprieve only applies to a principal residence. So, if you had a loan modification or a short sale on a vacation home, you will have to report the debt as forgiven, and, as such, taxable.
But remember, you do not have to pay taxes on debts settled in bankruptcy. So, in these taxing times, a qualified bankruptcy attorney can help you conquer your creditors and get you back on track for a better financial future. Specifically, the bankruptcy attorneys at the Law Offices of John T. Orcutt offer a totally FREE debt consultation and now, more than ever, it’s time to take them up on their offer. Just call toll free to 1-888-234-4181, or during the off hours, you can make your own appointment right online at www.billsbills.com. Simply click on the yellow “FREE Consultation Now” button.