Have you received a form in the mail that says you owe money for a forgiven debt and don’t understand why? Here is what you need to know about canceled debt and taxes.
Consumers who have had part or all of a debt forgiven live through this situation all the time. The reality is, canceled debt may help you regain control of your finances, but the IRS still wants its share of this income you received.
To understand the tax ramifications of canceled debt, it helps to know how this works. Whether you have a credit card debt, a mortgage to pay, or a car loan, this debt can become canceled in a variety of ways.
But after reaching a payment settlement or short sale, for example, debt just doesn’t go away. The debt that isn’t paid back, becomes income to the consumer and the government rectifies this situation by charging taxes on forgiven amounts.
Creditors and debt collectors that accept at least $600 less than the amount you owe them are required by law to file 1099-C forms and send consumers a copy to use when they file their taxes.
But, consumers don't always know they are required to pay income taxes on the forgiven debt. So, imagine their surprise when they receive a 1099-C in the mail that could lead to a larger tax bill.
The IRS offers several exceptions to the rule, so if you want to know if you qualify for an exception, you may want to speak with a tax professional who can look at the details of your unique tax situation.