Q&A: Is debt forgiven by a creditor through negotiation counted as taxable income by the IRS?
by lewishamdreamer
Question by mjwolf53: Is debt forgiven by a creditor through negotiation counted as taxable income by the IRS?
I don’t understand how something that was potentially income for the creditor can suddeny count against the debtor, especially when a percentage of it was interest, anyway.
Best answer:
Answer by Helen, EA in PA
Yes, unless you are bankrupt or insolvent, you will have income on the forgiven debt.
YOU got something for nothing (the debt is forgiven), thus it is income to you.
Helen, EA in PA
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about 1 year ago
Yes it is considered unearned income and you are responsible for the amount. It does not matter what this amount was made up of. This is because they will write off the settlement amount as a loss on their taxes and take the deduction. So it becomes income to you and you must pay the taxes.
So for example if your debt was $ 10,000 and you got them to settle for $ 7500 you would owe taxes on the $ 2500. Now, the tax you are paying is still going to be much less than the full $ 2500 so you are still getting a deduction in the amount you owed.
You are supposed to report any income you receive, but until the settlement amount is over $ 600 you won’t receive a 1099-C
about 1 year ago
The IRS does not require creditors who discharge debts or any portion of the debt to file a Form 1099, no matter how much the debt is worth. Second, although implied, creditors rarely file Form 1099 even when the debt remains unpaid.
Did you receive an official looking letter that reminds you of a debt you have not paid. The letter refers to the creditor’s “right to forgive this debt and submit a Form 1099 to the Internal Revenue Service on all bad debt accounts.” The last sentence usually reassures you that the creditor does not intend to take such an action at this time, and then urges you to remit payment to “avoid any additional collection activity.
This type of representation violates Section 807(10). This, in turn, may create the additional false impression that the IRS has been informed about the debt at issue, also in violation of Section 807(10).
EDIT: Here are some of the rules as issued by the IRS
If a federal government agency, certain agencies connected with the Federal Government, financial institution, credit union, or an organization having a significant trade or business of lending money (such as a finance or credit card company) cancels or forgives a debt you owe of $ 600 or more, this form must be provided to you.
NOTE< this does not include 3rd party collection agencies!!
Do not report a canceled debt as income if you did not deduct it but would have been able to do so on your tax return if you had paid it. Also, do not include canceled debts in your income to the extent you were insolvent.
Hope this answer is of help to you
LEGAL DISCLAIMER: The answer provided here is intended for informational purposes only. It is not intended nor presumed to be legal counsel or professional legal advice
about 1 year ago
If you are financially solvent you could have a taxable event.