Good news! Your creditor has agreed to settle your $20,000 Citi Card credit card for a fraction of what you owe! You save thousands of dollars and have one less debt to worry about. You’re on your way to resolving all of your debt.
There’s just one problem. You may be on the hook to the IRS for the forgiven debt. So that could be a few thousand dollars that you now owe.
Why does the IRS tax you for your forgiven debt?
If a creditor has forgiven over $600 of your debt, you will receive a 1099-C Cancellation of Debt form. The IRS counts the forgiven debt as income and as such, they want their cut of your income just like with your regular wages and salary.
This is understandable as you would have had to use your income to pay down your debt and now you have that money available for other needs.
But, you may not have to pay any taxes thanks to the bankruptcy code.
If you are insolvent at the time of the settlement, meaning you have more liabilities than assets, then you will not have to pay any taxes on the forgiven debt.
The publication you want to review is IRS publication 4681. You need to read about the exemption for insolvency.
You need to calculate your net worth and if it’s negative, you won’t owe any money on your forgiven credit card debt.
Let’s take a look at an example from CreditCards.com:
“That means that if, in the example of the $5,000 of forgiven debt income, the individual had total assets valued at $50,000 and liabilities totaling $53,000 just before the credit card debt was canceled, their finances were under water by $3,000. The $5,000 canceled debt income would be reduced by the $3,000 insolvency. Only the remaining $2,000 in forgiven debt would be reported on the tax return as income. If the person was insolvent by $5,000 or more, then all of the canceled debt income would be exempt from taxation.”
You can claim this exemption even if are working and have a regular income. You can be making money and still be insolvent.
After you have read IRS publication 4681, you need to fill out IRS form 982. Here’s some advice on filling out this form to make sure you don’t have to pay any taxes from Yahoo Finance.
National Debt Relief does not offer legal advice and you will need to consult a tax professional to help you complete the form.
Just because you received a 1099C for your cancelled debt doesn’t mean you have to pay taxes on the forgiven debt.
You were already in a financial crisis with your unsecured debt and you don’t want to get into a financial crisis by owing the IRS more than you need. You can consult a tax professional and get the proper advice to help you claim the insolvency exemptions for which you are entitled and reduce your tax liability as much as possible legally.
That is the best of both worlds, you get your credit card debts forgiven using National Debt Relief and then you don’t have to pay any taxes when you qualify for the insolvency exemption of your 1099-C. Then you can quickly get back on your feet financially.
