If a credit card company or other creditor cancels your debt, That, AOS very good news, right?
This debt relief usually occurs when the creditor waives recovery of the debt or when the statute of limitations on debt collection is exhausted.
debt cancellation is not all positive news, however.
Apart from the negative impact on your credit report, you may need tax on the canceled amount.
you should receive a Form 1099-C, Cancellation of debt of the company, they also send to the IRS. The debt amount on the 1099-C is canceled as taxable income on your return, unless you qualify for an exception.
When banks are required to report the canceled debt
If your debt is canceled by bank, the bank must report to the IRS. The IRS requires banks to declare the cancellation of the debt owed to one of the nine, Äúidentifiable events, in the most common of these events.
- A discharged bankrupt debt
- Other federal or judicial procedures of the State which are non-binding debt
- expiration of the limitation period to collect a debt
- a negotiated settlement with the debtor
- Termination of collection activity, if it is based on a decision or within their defined policy
It may not be clear to you why the debtor bank or creditor decides to report to the IRS.
However, if you receive a Form 1099-C, you must pay tax on the amount canceled, unless you experience an exception to the rule.
Exceptions to the rule
1. The main exception to pay tax on the canceled debt is if you can show that you were insolvent when the debt was canceled.
To be insolvent means that you have more debt than assets. If you couldn AOT pay your bills and bank canceled your debt, you are probably eligible.
You must have been insolvent immediately before the debt was canceled. It, AOS is not enough to tell the IRS you were insolvent. You must complete an IRS worksheet to prove insolvency debts were greater than your assets.
If you weren insolvent AOT, you usually have to pay tax on the canceled debt.
2. If these debts were rejected because you have declared bankruptcy, you were insolvent. You do not pay tax on the cancellation of debt.
How much tax you have to pay?
to pay the tax is still better than paying the full balance.
For example, if you Aore in the tax bracket of 15 percent, an additional $ 1,000 in taxable income will cost about $ 150.
IRS will tack on interest expense, but fortunately, interest rates for individuals are relatively low.
Were you surprised to receive a notice of cancellation of the debt of a debt long forgotten or a debt that you didn, AOT know you had?
photo credit: chrisschoenbohm
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