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Cancelled Debts and Taxes

March 7th

debt cancellationHaving a debt cancelled by a creditor can be an appealing idea for those experiencing financial hardships. However, there are certain tax consequences that could result in owing the IRS money if you aren’t careful. Knowing about these potential consequences ahead of time can prevent you from ending up in tax debt or owing money on what was supposed to be a forgiven debt.

Debt Cancellation

There are some situations in which a borrower may be fortunate enough to have a debt cancelled by a creditor. Whether the debt is credit card debt, or a mortgage debt, the amount that was forgiven by the creditor is required by law to be claimed as income on your tax return. The only exception being that, since 2007, mortgage debt cancellations have been excluded due to a federal bill. The Mortgage Debt Forgiveness Relief Act has allowed homeowners who had debts cancelled by lenders to be excluded; however, this bill is set to expire later this year.

The best strategy when resolving debts that involve a cancellation of debt is to claim the amount that was forgiven on your tax return, in order to be safe and avoid IRS penalties. When a creditor cancels a debt they are supposed to provide the borrower with a 1099-C form. However, it is ultimately the responsibility of the borrower to obtain this form and file it with the IRS.

 

 

 

 
 
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