What is a 1099-C?
A 1099-C is a statement from the IRS that you may need to include the amount of a forgiven or settled debt as income.
Let's say you are going through a very tough time financially and cannot keep up with the payments on your credit cards or personal loans.
At some point, you (or a Debt Settlement Company), may be able to negotiate a settlement on the debt you owe for less than the balance.
If the amount forgiven is over $600, the creditor may claim that as a loss to the IRS and you would then receive a form 1099-C.
At first glance, it looks as though you have no choice but to include the amount forgiven as additional income and therefore, you may have to pay additional income tax!
According to IRS Form 4681, you DO NOT HAVE TO INCLUDE the amount forgiven or settled if at the time of the forgiveness you were INSOLVENT.
Sadly, most accountants or tax preparers are unaware of how to avoid this additional tax.
How to prove you were INSOLVENT:
List all of your assets. Your assets include:
Equity in your home. (What your home would sell for today less what you owe.)
Cash, stocks, bonds, mutual funds. (Come on...most people who are in a financial crunch don't have extra money laying around!)
The net or current values of your "things":
- Car (it's probably not worth as much as you think!)
- Boat, Four-Wheeler, Motorcycle, etc.
- Furniture, tools, (get the idea?)
Now, you are going to offset this by the debt you owe:
- Mortgage (don't forget the 2nd or equity line of credit
- Student loans
- Auto loan
- Personal loans
- Credit cards
- Store cards
- Back taxes!
- Medical bills
This should show that at the time of forgiveness, you were insolvent (you owe more than your worth).
You will submit this financial worksheet along with IRS Form 982 with your tax forms.
If your tax preparer is not aware or does not seem competent dealing with this procedure, let us help!
In over 8 years of helping people reduce their debt, we have not had a client pay any additional income tax as a result of a settlement!
Need More Info? Give us a call today!
1-877-492-41096
photo by: Stefan Baudy
