It is possible to receive a 1099 tax form for unpaid credit card debt. Example: You settle a $2,500 credit card balance for $1,000 -- a savings of $1,500. According to the Bankrate.com website, the IRS will treat the $1,500 as income because you never paid it. The 1099 C will be issued by your creditor and must be addressed on your next federal tax return.
Identification
The IRS form "Cancellation of Debt Form 1099 C" is a short document similar to a W-2 wage and tax statement. It lists the creditor's name and your name, along with the amount that was unpaid. You could receive the 1099 C as a result of a settlement or a write-off by the credit card company. A write-off is an internal accounting term used by credit card companies when they close an account because of non-payment. Copies of the 1099 C are sent to you and the IRS. Bankrate.com says debt forgiveness of $600 or greater is eligible for a 1099 C.
Considerations
Bankrate.com says potential tax implications should be an important part of any debt settlement strategy. After consulting with your accountant or tax adviser, you may decide to extend your debt strategy over more than one year to lessen the impact on your taxes.
Expert Insight
The IRS does allow for some exceptions for reporting income from unpaid credit card debt. One of the most common exceptions is insolvency, according to NOLO, a legal website. Insolvency means that you were financially insolvent before the creditor decided to settle or write off your debt. To declare insolvency, your debts must exceed the value of your assets. Example: Your assets are worth $50,000 and your debts total $65,000, resulting in an insolvency of $15,000. You settle a debt resulting in a $9,000 savings for you. According to NOLO, none of that money has to be declared on your tax return because the $9,000 is below your insolvency threshold. IRS Form 982, "Reduction of Tax Attributes Due to Discharge of Indebtedness," must be filed if you are declaring insolvency. See a tax adviser for a complete understanding of this exception.
Prevention/Solution
Paying your credit card debts in full will prevent you from receiving a 1099 C. You can accomplish this by making payments as agreed, or by negotiating a special payment plan with lower monthly payments.
Warning
NOLO says you should always account for a 1099 C on your taxes -- unless you are filing for an exception. Not including a a valid 1099 C on your return could lead to a complete audit of your taxes, the site says.
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