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Paying Tax on Forgiven Debt
Many of us have experienced the nightmare of having our financial circumstances change for the worse. When your income has reduced due to job loss, injury, or any other reason, you may find that paying your bills on time and in full becomes very difficult. If you’re struggling with your bills, it might be a good time to work with your creditors and get some of your debt forgiven.
Getting debts forgiven can bring a major relief to your wallet – but you should remember that you will need to revisit this forgiven debt when tax time rolls around. Often, a debt that is forgiven can still count as taxable income. For example, if you owe $10,000 on a car loan and you’ve paid $6,000 of it, your creditor may cancel your remaining $4,000 balance. However, the IRS views that $4,000 as regular income, so you will need to include it on your tax return.
Debt forgiven in bankruptcy
Debts that are discharged in bankruptcy do not count as taxable income. Often, when you have debt larger than $600 (principal balance only; interest is excluded from this figure) discharged, the creditor who discharged it will send you and the IRS a form 1099-C, which is a notification of a cancellation of debt.
To ensure you are not taxed for the discharged debt on the 1099-C or any other debt discharged in your bankruptcy, you may want to file an IRS Form 982. This form denotes your debts that were discharged in bankruptcy and allows you to reduce tax attributes.
You will need to file the Form 982 in a timely manner so that you can prove that the debt was cancelled as a result of your bankruptcy. If you file late, it may appear that the debt was forgiven outside of bankruptcy, which means the debt will be considered taxable income.
File a timely tax return
To avoid monetary penalties from the IRS, be sure to file your taxes or, if you need an extension, file your extension request on time. The Bankruptcy Code states that failure to file taxes or a request for an extension in a timely manner can result in conversion of your bankruptcy case to another chapter (such as from a Chapter 13 to a Chapter 7) or dismissal of your case. If you are granted an extension but you do not file within the 90-day extended period, your case will be dismissed.
Questions about including forgiven debts on your taxes? The Ohio consumer debt attorneys can help.
You don’t have to figure out your taxes on your own; an experienced debt relief attorney can walk you through any forms you receive and help you understand how to properly file your taxes. Call the Ohio consumer debt attorneys at Luftman, Heck & Associates today for a free consultation on your case at (888) 726-3181 or by email at firstname.lastname@example.org.