Debt Forgiveness and Taxes
I Owe Taxes for WHAT????
When a lender forgives some of your debt, it can trigger the lender sending you an IRS 1099 form showing that the amount of debt forgiven is taxable income to you! And when you get a 1099, the IRS also gets a copy.
What??? Most people are very perplexed by this situation, and most don’t know how to handle it. In fact, many professional tax preparers don’t know how to handle it!
If you are receiving a 1099 on debt that was forgiven on your principal place of residence in 2007 through 2009, OR if you were insolvent or filed a bankruptcy, you can file IRS form 982 and you will NOT have to pay taxes on your forgiven debt.
The Mortgage Forgiveness Debt Relief Act of 2007 allows you to avoid any tax liability for any forgiven debt so long as it related to the purchase, building or improvement of your primary residence. It currently applies only to debt forgiven in 2007 through 2009.
The “catch” is that you have to KNOW about this and take action to claim your rights. Most individuals and many financial and tax advisors are not aware of form 982 and the various circumstances under which you can avoid paying taxes on forgiven debt. So it’s up to you to exercise your rights!
To exercise your rights, you’ll need to file the “long form” 1040 and file IRS form 982 to deal with your debt forgiveness. For more information, or to get Form 982, go to www.IRS.gov and enter either “form 982″ or “Mortgage Forgiveness Debt Relief Act” into the search box.
The other circumstances in which your debt forgiveness won’t count as income under Form 982 include debts in bankruptcy cases and debts forgiven to the extent that you were “insolvent” at the time. Being insolvent means that your debts exceeded your assets and the amount of debt forgiveness that’s excluded from your taxable income is limited by this amount. IRS Form 982 has an example of how to calculate this and other helpful explanatory information.
Remember, any forgiveness of debt can trigger a 1099. If you receive a 1099 for discharged or forgiven debt, avoid a potential tax bill; claim your rights by filing IRS Form 982 with a 1040 long form tax return.
(c) 2008 Hummingbird Credit Counseling and Education, Inc.