Press Release – Forgiven Credit Card Debts and Taxes
Tampa, Florida, Tuesday, March 6, 2012: Did you know that all forgiven debt is considered taxable income? “Any debt forgiven is taxable, unless you can prove that the debt was discharged in bankruptcy or that you were insolvent when the debt was forgiven,” says Darrin Mish, a tax attorney based in Tampa, Florida. “The other way a forgiven debt may not be taxable would be when it is a cancelled mortgage debt on your primary residence,” added Mr. Mish. Click here to read or watch more IRS Help resources.
Many taxpayers have been surprised to discover debts they held a long time ago only recently being forgiven. Some even received notification of debts from as far back as decades past only now being cancelled. You would know you have a debt forgiven when you receive a Form 1099-C Cancellation of Debt from your creditor. A copy of this form is also sent to the IRS. Click here to watch or read more information on IRS Back Taxes.
This year, the IRS anticipates that creditors will send taxpayers 6.4 million 1099-Cs, an increase from 3.9 million in 2010. The rise is likely due to credit card defaults during the economic recession. It is estimated that the country’s six largest credit card companies wrote off more than $75 billion in bad debts in 2009 and 2010.
Furthermore, Treasury regulations encourage financial institutions to issue 1099-Cs for debts that have gone at least 36 months without collection efforts, even if the debts have not been forgiven.
Due to the age of the debts it is common to find many Forms 1099-Cs riddled with inaccuracies, according to the IRS Taxpayer Advocate, Nina Olson. Ms. Olson also says that some taxpayers have received more than one 1099-Cs for the same debt.
Another development that is likely to affect the number of 1099-Cs is the imminent expiry of the provisions of tax exemption for cancellation of mortgage debt on primary residences under the Mortgage Forgiveness Debt Relief Act at the end of 2012. The Act gives exemption from tax for debt forgiven on mortgages of principal residences as a result of a loan modification, short sale or foreclosure. But when the provisions of this Act expire, thousands of homeowners who owe more than their homes are worth could be liable for taxes on their forgiven debts. According to Ms. Olson, “When the law was enacted, no one conceived it would take longer than 2012 to dig out of the mortgage crisis.”
If you want to know what to do with taxes charged on forgiven debts, call Mr. Mish’s office at (813) 229 7100 for a free consultation.