The Money Mentor: Are You Being Haunted by Old Debt?
Have you ever been issued a credit card that was charged off due to non payment? Did you know that a charged off credit card balance is considered taxable ordinary income, according to the IRS. Charged off credit card debt that is either canceled or forgiven may cause taxpayers to receive a 1099-C. A 1099-C is a tax form issued to taxpayers if they incur $600 or more in canceled or forgiven debt. The issuing company must be applicable entity which includes a: financial institution, credit union, federal government agency or a money lending company.
Exceptions to the rule
There are exceptions for not reporting the 1099-C as ordinary income. If you were insolvent or the debts were discharged in bankruptcy you are exempt from reporting the amounts on your income tax return. The IRS has provided worksheets that taxpayers must use to prove their insolvency. Keep in mind that your debts have to exceed your assets, and your insolvency is reported on IRS Tax Form 982.
Debts that were discharged in bankruptcy are not taxable. But if you still received a 1099-C you still have to report the income, keep in mind to exclude the income you have to use IRS Tax Form 982 to report the exclusion.
Ignoring will not help
If you are in disagreement with the organization that issued you the 1099-C, do not ignore the tax form and refuse to file the tax form. Keep in mind, any tax form that has been sent to you in the mail has also been reported and filed with the IRS. If you believe the tax form has been sent to you in error, call the institution that issue you the form and see if they will revise the tax form sent in error. Always consult with your accountant, CPA or tax advisor, if you feel overwhelmed and need guidance on any tax matters.
About the Author:
Lorillia Brown-Phillips is a Financial Literacy Educator and Author of “Jump Start Your Credit: How to Negotiate and Settled Your Debts in 10 Steps”, she can be reached at www.yourmoneymentor.com