1099-c?

If they do you can use your out of pocket medical expenses as a deduction against it! I think it is everything that exceeds 7 percent of your income but check with a tax professional!

Any debt that is forgiven is income to you and must be reported as such on your taxes. All companies must send you a 1099-C and they must send copies to the IRS and to your state's tax authority. They said three years because that is the SOL for filing back returns. You can read more on this at irs.gov, or call the IRS (expect an annoyingly long wait until your call is answered).
I doubt you will be able to write it off under the medical expenses deduction on schedule A. That deduction is for out of pocket medical expenses, i.e. expenses your insurance didn't pay for and you did.

The last time I called the IRS I waited 30 minutes for an answer! They play Mozart over and over! If you can do it on line, go for it, or pay a visit to a local office if there is one near you! That is what I wound up doing and found them surprisingly easy to work with!

Thanks everyone for your replies. Just so I am clear on this we are talking about federal withholding? I made $51,000 last year and $2788 was taken out for Federal Income Tax Withholding. Can I assume that in this "additional income" of $66,000 would mean that I would pay another $2788 for the first $51000 plus $1000 or so for the additional $15000?

Which is why I said that if you called the IRS you should expect an annoyingly long wait. Even tax pros have to wait and during tax season it can take over an hour.

We are talking about both federal and state taxes. In order to save time, most states use the income information you report to the IRS and apply their own calculations as to how much you owe. The calculation of your income doesn't mean your withholdings. Your withholdings are how much you've paid in taxes from your paycheck over the year. This is a separate source of income. If you get a 1099c it should be reported as "misc income" on line 21. If you want to pay tax on the amount of the forgiven debt it should be 10% of $66,000 to the IRS and what ever percent your state Department of Revenue levies on $66,000. The IRS also has a guide and a worksheet on their website about estimated tax payments.

Then report the payments on your tax return for this year on the form for estimated tax payments. If you go to a reputable tax pro next tax season and bring all your stuff with you (including the receipts for any estimated payments you make) they can see that it's reported right.

Please correct me if I am wrong, but if the medical expenses are paid on the remaining balance after the settlement can't a deduction be taken on the portion that was un-reimbursed by any insurance plan if it is greater than 7.5 percent of his or her adjusted gross income? I am getting that info directly from a NAIFA manual that I am currently studying! That deduction could be used to offset the additional income reported on the 1099c from the forgiven portion!
In other words the money spent on medical bills is deductible and the money forgiven is taxable!

You can take a deduction on your out of pocket medical expenses that are greater than 7.5% that you actually paid. This reduces your taxable income. It is still safer to pay taxes on the full amount, and possibly get a larger refund at the end than to be faced with a huge tax bill. Or so HR Block taught me.
I did say that the money forgiven is taxable, I don't know why you're saying I didn't.

I did not say that! If it came across that way I apologize!

You should confirm that the law hasn't changed, but if you are technically bankrupt at the time that the debt is "written-off" and you are issued a 1099, you do not have to claim that amount as income. You do not have to have filed for bankruptcy. You simply have to be able to establish that your debts exceed your assets at the time of the write-off. You will likely receive a letter from the IRS stating that you made an error by not including it because the IRS will not know the basis for your decision. I did. I simply sent them all of the documentation with a copy of their own statute and they closed the file. Good luck!!

That is very interesting but not entirely supportive of all the facts! The poster is not bankrupt, just insolvent as stated! The IRS will take that into consideration and put the person into CNC (currently not collectable) status! They will put a lien against any future assets! The bill to the IRS will not be forgiven! It can be negotiated with an OIC, (Offer in Compromise) in the future.
I was informed by a tax attorney that the IRS frowns upon anyone trying to cut a deal after they have proved they have the ability to pay even if they were incapable previously! That is just one professionals opinion; but one fact that does not change is the fact that the IRS will not forgive a tax bill because a person is in debt! They will wait for situations to change and then pounce! That is why they put liens against future assets! It is always in the best interest of the person owing the taxes to communicate with the IRS frequently!

Frog Patch, with all due respect I think you are missing the picture here. The insolvency rule will make it so that the IRS never is asking for the tax on the 1099c money and therefore there is no need to file and offer in compromise (or a deferred payment installment agreement).

Lots of Debt!, First of all, I have to laugh because that was the name I used before I became a member too! Then I picked a more empowering name :).

Let me explain "You are insolvent when, and to the extent, your liabilities exceed the fair market value of your assets. Determine your liabilities and the fair market value of your assets immediately before the cancellation of your debt to determine whether or not you are insolvent and the amount by which you are insolvent." (Source: Publication 908)


In other words, you have $100,000 in medical bills. Now I’m just going to throw some more numbers in to make more real. You have a home that is worth $250,000 but you owe $320,000 on it and you have $25,000 in CC bills as well. Lets also say you have a $10,000 car you own outright and some furniture and stuff that is worth $5,000. So here is your calculation:
Liabilites
House $320,000
CC’s $25,000
Medical Bills $110,000
Total Liabilites $455,000

Assets
House $250,000
Car $10,000
Other Stuff $5,000
Total Assets $265,000

Therefore you are insolvent to the tune of $190,000. There for when you get your 1099c you use these numbers because this was your scenario immediately before the reduction of your medical debt by 60%. (you would fill out form 982 and check the box 1b and then put $190,000 in line 2…that is the amount below which you don’t have to claim the 1099c income.)

With the way the real estate market has stripped all of the equity out of our homes it is pretty easy to be insolvent (by IRS standards) these days.

Feel free to post more details about your financial picture and I’ll help you analyze this more. I have studied this section out quite a bit and have a Masters in Taxation.
Good Luck!

We really need to be careful on the information given here. The original poster may well be worrying about nothing.

DFSTB, well-stated and 100% correct, as I read the IRS. I still have a decent life but am clearly insolvent and will not pay taxes on $200,000 of forgiven debt for the year. If I had to pay tax, I could not have settled....but then again, if I had enough money to pay the tax on that much forgiven debt, I would not have defaulted.

Obviously, get a tax professional to bless this. But, I have done so for my situation and due to the value in my home dropping from $650k to $250k (the cause of all my trouble) I am insolvent easily with no question. They say to just use zillow or other real estate sites for valuation and if close the irs does not challenge.

Hi, I am doing this 'insolvency' calculation and want to ask if I need to count my 401k as an asset? Also bank account? My car is 18 years old, surely has no value.
thanks

When I first became unemployed and went to see the IRS about back taxes I owed on the last time I was unemployed (yes they do tax unemployment compensation) They would forgive nothing! They placed me in CNC status and slapped a lien on me until I was solvent again! Then they insist on a payment arrangement! It totally wrecked my credit and made buying any property impossible until the bill is settled! I must be dealing with a different IRS with different rules! There was no forgiveness for the jobless! I will eventually have this paid off and the lien will be removed!

that sucks that they did that. but the insolvency rules that apply are in the tax year the 1099 is received, with each calculation done as of the date the settlement is paid. So your situation would not apply to this.

So I just was doing this on paper and thought of something that muddies the waters..
If you do each calculation on date of settlement I may be insolvent in the beginning but not with last settlement..
Example: My assets are real estate 306k and my 401k of 40,000 so total assets are 347k.
My liabilites are real estate 276 and credit card of 92k so I am insolvent by 21k. So far so good but then I plan to settle 2 Citi cards first for 36k leaving 2 more CC's so when I get to the next ones I will no longer have 92k in CC debt...I will by then have settled and have only 56k in credit card debt which changes me to solvency if I am doing this right???
Please advise and also you are saying we will have x number of these worksheets depending on how many settlements we have?
thanks,
Kaylee