When you negotiate a debt settlement with a creditor and the settlement amount is less than the full balance you owe, the creditor forgives the remainder of the debt. This means that once you pay off the agreed settlement amount, the creditor considers the entire debt as paid in full and will no longer pursue you in an effort to collect the debt.
Federal Income Taxes
If the forgiven amount of the debt is more than $600, the IRS requires the creditor to send you an IRS Cancellation of Debt Form 1099-C. If the amount is less than $600, the IRS does not require the creditor to send you a Cancellation of Debt Form, but still requires you to claim the forgiven amount as other income on your federal Form 1040. Including the forgiven debt as income on your federal taxes increases your total taxable income.
IRS Debt Forgiveness Exceptions
The IRS allows you to exclude certain types of forgiven debt on your federal tax returns. This means that you do not have to claim the excludable forgiven amounts as income on your federal Form 1040. Examples of excludable debt include qualified farm, business real estate and primary residence debt. You can also exclude from your income any debts cancelled in bankruptcy. To determine whether your debts are excludable, contact a tax adviser to discuss your specific type of debt.
Mortgage Debt Forgiveness
The Mortgage Debt Relief Act of 2007 allows you to exclude your forgiven mortgage debt after a foreclosure. As of May 2011, this act is set to expire in 2012. Before this act, if your lender foreclosed on your home and sold it for less than what you owe on the mortgage, you would have to claim the difference between the foreclosure sale price and your remaining mortgage balance as income on your federal tax returns. If your lender forgives your mortgage debt, you must file a Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Form 982.
Mortgage Debt Forgiveness Qualifications
To qualify for mortgage debt forgiveness under the Mortgage Debt Relief Act of 2007, the home must have been your qualified primary residence. A qualified primary residence is a home in which you lived for at least two of the five years prior to the foreclosure. The maximum amount of forgivable mortgage debt is $1 million if you file your federal taxes as single or married filing separately, and it is $2 million if you file your federal taxes as married filing jointly.
0 comments:
Post a Comment