Finally! You settled your credit card debt. Now you can start fresh, rebuilt your credit and start saving, oh so you thought. If you thought your money troubles ended last year when you settled that credit card debt, think again. Many of us are unaware that forgiven or canceled credit card debt may be taxable income.
Depending on the amount of debt forgiven or how much you settled for, the taxpayer’s income level, deductions, and other factors, you could face a sizable tax bill come tax season. Creditors and debt collectors that agree to accept at least $600 less than the original balance are required by law to file 1099-C forms with the IRS. The IRS then requires the borrower, that's you, to report that amount on a tax return as income, and it’s often an unpleasant surprise.
For example, if you have a balance of $10,000 in credit card debt and settled the debt by paying $6,000 of the balance - you have $4,000 in forgiven debt income. That $4,000 must be reported as “other income” when tax time arrives and there are only a few exceptions to this surprise, which are:
Debts canceled when you were broke
All debt was canceled in a bankruptcy
Your student loans are forgiven after you’ve worked a period at a provision based service job.
Debt on your business credit card, which you used only for your sole proprietorship business.
If the cancellation of debt is a gift, it’s not income.
You may not have to pay tax on canceled debt if it was in connection with your farm, or if the debts were attached to business real estate and were forgiven when you owed more than the property was worth.
Now that you know, here are a few tips for this tax season if you’ve settled for at least $600 less than your initial balance:
Make an appointment with us before finalizing a debt settlement.
Clarify with the creditor or debt collector the exact amount that will be declared on the 1099-C form.
Be aware that the 1099-C is coming. Don’t throw it away. Forward your 1099-C to us with all of your required documents.
If there is a dispute about the amount reported on the form, contact the creditor or debt collector immediately to resolve the matter. Ask for a corrected 1099-C form.
Hopefully, this helps and takes the surprise out of your tax season. We are here to answer your questions and make this experience as knowledgeable and stress-free as possible.
Until next time, follow up on our social media platforms and we will catch next week with another tip!
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