Ask The Money Coach

Posts Tagged ‘IRS Publication 4681’

Anytime a bank, credit card issuer or financial company writes off $600 or more worth of your debt, they have to send you a 1099-C, Cancellation of Debt. They also send that same form to the IRS, so Uncle Sam knows which debts you got away with not paying.

And here’s the catch: the IRS considers most forms of forgiven consumer debt to be taxable income to you.

“Most people don’t pay attention to the tax consequences when they are
 settling their debt,” says Bill Hardekopf, CEO of LowCards.com and author 
of The Credit Card Guidebook. “They are just trying to figure out how to
survive. The additional tax bill is usually an unwelcome surprise.”

For example: assume you owed a $5,000 credit card bill, and you settled the debt by paying just $2,000 to your creditor. The $3,000 that was “forgiven” is taxable income.

There are exceptions to the rule, however, and in some cases you won’t have to pay taxes on forgiven debt.

Two big exceptions, according to the IRS, are if you were financially insolvent or you filed for bankruptcy protection. In such cases, that written off credit card debt is not taxable.

Another exception: if you were among the scores of homeowners who got a 1099-C for mortgage debt that was forgiven – after a foreclosure, short sale or loan modification of your primary residence – then that debt is also not taxable, thanks to the Mortgage Forgiveness Debt Relief Act of 2007.

But the prospect of getting a big tax bill after you’ve settled a credit card obligation is just one of the dangers of debt settlement. It’s also one reason that I advise consumers to stay away from using debt settlement for debt relief.

But if you don’t know any better, I know it’s hard to resist those commercials on TV or the radio and those online ad promising to help you get rid of most of your credit card bills with debt settlement.

At least you know better now.

And you can get even better educated on this topic if you check out IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals).

You’re also not alone in dealing with the issue.

The IRS expects to receive 2.8 million 1099-C forms in 2011 and another 3.1 million in 2012 – proof that debt-ridden Americans grappling with foreclosure and credit card bills are increasingly trying to get from underneath their financial burdens.

Related Questions:

• irs publication 4681 2011
• publication 4681 2011
• publication 4681 for 2011
• pub 4681 2011
• pub 4681 credit card
• Pub 4681 short sale
• 2011 publication 4681
• irs form 4681
• what do i do with a 1099-c
• 2011 pub 4681
• 2011 irs pub 4681
• publication 4681 2012

If you settled a credit card debt last year, by paying less than originally owed, the debt settlement company probably didn’t tell you this, but the IRS will: You likely owe taxes on the amount of debt that was forgiven.

Anytime a bank, credit card issuer or financial company writes off $600 or more worth of your debt, they have to send you a 1099-C, Cancellation of Debt. They also send that same form to the IRS, so Uncle Sam knows which debts you got away with not paying.

And here’s the catch: the IRS considers most forms of forgiven consumer debt to be taxable income to you.

“Most people don’t pay attention to the tax consequences when they are
 settling their debt,” says Bill Hardekopf, CEO of LowCards.com and author 
of The Credit Card Guidebook. “They are just trying to figure out how to
survive. The additional tax bill is usually an unwelcome surprise.”

For example: assume you owed a $5,000 credit card bill, and you settled the debt by paying just $2,000 to your creditor. The $3,000 that was “forgiven” is taxable income.

There are exceptions to the rule, however, and in some cases you won’t have to pay taxes on forgiven debt.

Two big exceptions, according to the IRS, are if you were financially insolvent or you filed for bankruptcy protection. In such cases, that written off credit card debt is not taxable.

Another exception: if you were among the scores of homeowners who got a 1099-C for mortgage debt that was forgiven – after a foreclosure, short sale or loan modification of your primary residence – then that debt is also not taxable, thanks to the Mortgage Forgiveness Debt Relief Act of 2007.

But the prospect of getting a big tax bill after you’ve settled a credit card obligation is just one of the dangers of debt settlement. It’s also one reason that I advise consumers to stay away from using debt settlement for debt relief.

But if you don’t know any better, I know it’s hard to resist those commercials on TV or the radio and those online ad promising to help you get rid of most of your credit card bills with debt settlement.

At least you know better now.

And you can get even better educated on this topic if you check out IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals).

You’re also not alone in dealing with the issue.

The IRS expects to receive 2.8 million 1099-C forms in 2011 and another 3.1 million in 2012 – proof that debt-ridden Americans grappling with foreclosure and credit card bills are increasingly trying to get from underneath their financial burdens.

Related Questions:

• pub 4681
• 1099 c 2011
• 2011 IRS Publication 4681
• 1099-c 2011
• 1099c
• can you get rid of income from credit card forgiveness
• 2011 1099-c
• information tax renturn policy 2011 1099-C 2011about how much pay money
• publication 4681 for the forgiveness of debt
• affects of settling credit card debt 1099
• if i settle a credit card can they 1099 me
• 1099 c credit card settlement

Q: Is It True That I Will Be Given a 1099-C When I Settle a Debt for $600 or More Off the Amount That Was Due? If So Exactly What Does This Mean? What is the Tax Percentage I Will Be Charged?
Is There a Tax Penalty Fee For This? And Will This Increase My Taxable Income Therefore Putting Me in a Higher Tax Bracket?

A: Yes, it is true that you will be sent a 1099-C, Cancellation of Debt, when you settle a debt with a creditor and that creditor cancels or forgives a debt you owe of $600 or more.

This means that amount of debt “forgiven” during a settlement will be treated as gross income, and you will have to pay ordinary income taxes on that amount.

For instance, let’s say you had a debt due to a financial company or credit card issuer. The debt you owed was $3,000. However, you negotiated a settlement of $1,000 to be considered as payment in full of your debt. In this case, you will pay $1,000, and the other $2,000 owed will be considered the amount of your debt that was “canceled” or “forgiven.” You will then get a 1099-C. Box 2 of the 1099-C will list $2,000. That is the amount on which you’ll have to pay taxes.

There is no “penalty” per se on 1099 income. It’s merely that you have to pay ordinary income tax on this money. The exact tax percentage depends on your own tax rate. As of 2010, the current tax rates in the U.S. are: 10%, 15%, 25%, 28%, 33% and 35%. Also, depending on how much debt you have had forgiven and where your income falls, yes, it is possible that forgiven or canceled debt can push you into a higher tax bracket.

Check out IRS Publication 4681, Canceled Debts, for more information. Also, look at Topic 431 – Canceled Debt – Is It Taxable or Not? You can find both documents online at www.IRS.gov.

Related Questions:

• 1099c tax rate
• 1099c percentage
• 1099c tax percentage
• does 1099 c increase my income
• what is the tax rate on cancelled debt
• what to do when receive 1099-c
• percentage of a 1099-C
• how can i figure out 1099c what is the pecentage
• does 1099c increases the tax bracket
• what percent do you pay on a 1099c
• what percent taxes do you pay on 1099-c
• penalty charges for 1099c