But while you can ignore old flames, you can’t dismiss past debts, even if your lender forgave them. Debts that were canceled or forgiven are considered taxable income – something many taxpayers don’t realize until they receive a 1099-C tax from their lenders.
During the Great Recession, lenders wrote off billions of dollars of credit card debts deemed uncollectible. Now, the tax bills on that debt are coming due. The IRS estimates that creditors will send taxpayers 6.4 million 1099-C tax forms this year, up from 3.9 million in 2010.
The appearance of an unexpected tax bill “creates a financial nightmare for people who have already been through financial hell,” says Gerri Detweiler, personal finance expert for Credit.com.
Fortunately, if unemployment or other financial calamities forced you to default on your debts, there’s a good chance you won’t have to pay the tax bill. You qualify for an exemption from taxes on forgiven debt if:
You filed for bankruptcy. Debts discharged in bankruptcy aren’t taxable, says Jennifer MacMillan, an enrolled agent in Santa Barbara, Calif.
If you receive a 1099-C for a debt that was discharged in bankruptcy, fill out IRS Form 982 and file it with your tax return, Detweiler says. Check box 1a, “Discharge of indebtedness in a title 11 case.” (Don’t be confused by the term “title 11” – that’s a reference to the section of the U.S. Code covering bankruptcy, not the type of bankruptcy you filed.) On Line 2, list the amount of debt that was discharged.
You were insolvent. If your debts exceeded your assets when the debt was forgiven, some or all of the debt reported on 1099-C is exempt from taxes. This exclusion is also reported on IRS Form 982. You can use a worksheet in IRS Publication 4681.
Your list of debts should include everything you owed when the debt was forgiven, including debts that aren’t dischargeable in bankruptcy, such as student loans. For assets, estimate the fair market value of everything you owned when the debt was written off.
Even if you’re accustomed to doing your own taxes, it may be worthwhile to consult with a professional tax preparer, Detweiler says.
Erroneous tax forms
Complicating matters, a significant number of 1099-Cs issued to taxpayers contain errors, says IRS Taxpayer Advocate Nina Olson. To comply with Treasury regulations, some lenders issue 1099-Cs for debts they haven’t tried to collect in 36 months, even if they haven’t forgiven them, she says. In other cases, taxpayers have received duplicate 1099-Cs for the same debt, she says.
In her 2010 report to Congress, Olson listed inaccurate reporting of canceled debt as one of the most serious problems facing taxpayers. The problem hasn’t gone away, Olson says, and taxpayers continue to face numerous obstacles when they try to challenge an erroneous 1099-C.
Shelley Cartier, 48, of Austin, recently received a 1099-C for a $6,400 credit card debt that was discharged when she filed for bankruptcy in the early 1990s. The debt was so old that the tax form was addressed to Cartier’s former married name and sent to her mother’s house.
When Cartier contacted the financial institution, she was told it was up to her to prove the debt was discharged. That’s a problem, because Cartier discarded her bankruptcy documents after holding on to them for the period required by law.
With help from her bankruptcy lawyer, Cartier was able to track down a service that she hopes will retrieve the court documents for her bankruptcy filing for $35.
“I don’t know how much time I’ve spent trying to clear this up,” she says.
Fixing the problem
The worst thing you can do when you receive a 1099-C is ignore it. When your lender sends you the form, it also sends a copy to the IRS, which will match the document with information on your tax return.
Contact the lender if you believe the information on the tax form is incorrect, MacMillan says. If your lender won’t revise the form, report the amount on the 1099-C on your tax return and make an adjustment to correct the error. Most tax software programs provide a way to explain the discrepancy.
Note that we are not attorneys or tax professionals. These guilelines are subject to change. Seek appropriate legal and tax advice.
Call The Mary Neilson Team for all your Fort Myers, Cape Coral, Fort Myers Beach, Estero and Bonita Beach real estate needs. Foreclosure and short sale experienced.
Direct: 239-243-5989 Email: mary@maryneilson.com
No comments:
Post a Comment