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Tax consequences

Date: Sat, 10/24/2009 - 10:17
Submitted by on Sat, 10/24/2009 - 10:17
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I need some help with the tax consequences of settling credit card debt. I read that if you are considered insolvent before you start settling with the credit card companies (your debts are more than your assets), then there is no tax consequence of the settlement. Has anyone else heard this?

Thanks for your input.


Yes, this is true. I do taxes for a living :) If you prepare your own tax return make sure you fill out form 982. If you have your taxes prepared for you make sure to let them know that your insolvent. You will get a 1099 form in the mail, which you must report, but properly filled out you will NOT pay any taxes on it.
Deanna


Submitted by on Sat, 10/24/2009 - 10:28

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Thanks, Deanna! I went to the IRS website, and found this to be true as well, before I saw your post. I cut and pasted the following directly from the IRS website:

A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. The forgiven debt may be excluded as income under the "insolvency" exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982. For more information, see highlights of the Mortgage Forgiveness Debt Relief Act.

Thanks again for your response!!!


Submitted by on Sat, 10/24/2009 - 10:36

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Quote:

Your creditors will report cancelled/settled debts exceeding $600 to the IRS and you are required to report the same as income on your annual tax return. In the event that a forgiven debt amount exceeds $600.00, Financial Institutions are generally required to provide a Form 1099-C. Please understand that if you receive a Form 1099-C showing income in the form of canceled debt, this does not necessarily mean that you owe taxes on the forgiven portion of the debt. In most cases clients can legally and ethically exclude forgiven debt from their income through the "insolvency exclusion" provided by the IRS code. This exclusion means that your liabilities exceed the fair market value of your assets, or in other words; you "Owe" more than you "Own". We recommend that you consult your tax advisor regarding your particular circumstance.


Sunil....you must quote other sites when you are cut and pasting.


Submitted by on Sat, 10/24/2009 - 11:45

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