Debt forgiveness can suck come tax time
Debt forgiveness does not get one free from The Government
Millions of people breathe sighs of relief yearly when granted debt forgiveness. Also called debt relief, debt cancellation, it's where a loans lender of some sort, like a charge card company, home loan lender or whomever, agrees to forgive a debt if the borrower agrees to pay off a portion, usually on a condensed payment schedule.
When it comes to debt forgiveness, the Wall Street Journal reports that many people will be annoyed to hear the government considers that income. It is technically a bonus towards petty cash and income, which means it is taxable.
Consumers have to report the cash on their tax forms with the form 1099-C, which forgiving lenders must give out.
Forgiven mortgage loans integrated
Debt forgiveness taxes could be a real kick in the nether regions when linked to home loans. When a home loan lender forecloses on a house and either forgives the debt, reduces the principle or agrees to a short sale, the fair industry value and forgiven debt for the home have to be reported on a 1099-C. However, the tax on it, for some, is excused for the time being.
In 2007, the government passed a law exempting certain foreclosed-on homeowners from a part of this debt. The law, the Home loan Forgiveness Debt Relief Act, also extends, according to CBS, to people who participated or are participating in the Home Affordable Modification Program or HAMP, who received a principle deduction or other modification that would otherwise be subject to the tax.
It does not include any second-home home loans, though it does consist of all primary residences, according to the Wall Street Journal.
Looking at expiration anticipations
Homeowners who are dealing with debt forgiveness for mortgage loans may have an easier time if claiming the amount over three years rather than all at once, which is one of the choices. When you have not claimed it yet, you should do so now, so you can get the tax exemption. It will only be accessible until 2014 now that the fiscal cliff negotiations have been finalized, according to CBS. It was going to expire last year, but now it is continued.
More people are receiving debt forgiveness or debt cancellation from lenders than ever. According to Creditcards.com, just over 1 million 1099-C forms were filed with the Internal Revenue Service in 2003, increasing to 2 million by 2006 and nearly 4 million in 2010. It's projected that in 2013, the Internal Revenue Service will obtain close to 6.5 million debt cancellation tax forms.
Wall Street Journal