Debt forgiveness is a great thing. A loan provider that decides to forgive some part of one's loans is good, but it comes with a caveat. The hitch is that the pardoned debt is handled and taxed as income by the IRS, which will hurt come tax season.
Adds up as income
Millions of people breathe sighs of relief every year when granted debt forgiveness. Also called debt relief, debt cancellation, it's where a loans lender of some sort, like a credit card business, mortgage lender or whomever, agrees to forgive a debt if the borrower agrees to pay off a portion, typically on a condensed payment schedule.
Debt forgiveness is actually taxable income though because it is recognized as an increase in someone's income, according to the Wall Street Journal. People getting debt forgiveness this year will be angry when they find out they have to pay extra taxes.
Borrowers have to report the cash on their tax forms with the form 1099 C, which forgiving lenders must give out.
Contains large mortgage loans
Sometimes, a mortgage that is forgiven is exempt from taxes, but much of the time, it is not. In fact, debt forgiveness could be really annoying with regards to forgiveness of a home loan. A 1099 C has to be used any time the lender agrees to reduce principle or agrees to a short sale.
Anybody in the Home Affordable Modification Program, or HAMP, could keep away from paying taxes on the reduction or modification of their home loan, according to a 2007 law called the Mortgage Forgiveness Debt Relief Act. It also helped people who were foreclosed on from dealing with additional taxes.
The Wall Street Journal explained that second home loans are not included. You can use any primary residence in the program though.
Talks saved it
Homeowners who are dealing with debt forgiveness for mortgages may have an easier time if claiming the amount over three years instead of all at once, which is one of the options. If you have not claimed it yet, you should do so now, so you can get the tax exemption. It will only be available 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 IRS in 2003, rising to 2 million by 2006 and almost 4 million in 2010. It's projected that in 2013, the Internal Revenue Service will get close to 6.5 million debt cancellation tax forms.
Adds up as income
Millions of people breathe sighs of relief every year when granted debt forgiveness. Also called debt relief, debt cancellation, it's where a loans lender of some sort, like a credit card business, mortgage lender or whomever, agrees to forgive a debt if the borrower agrees to pay off a portion, typically on a condensed payment schedule.
Debt forgiveness is actually taxable income though because it is recognized as an increase in someone's income, according to the Wall Street Journal. People getting debt forgiveness this year will be angry when they find out they have to pay extra taxes.
Borrowers have to report the cash on their tax forms with the form 1099 C, which forgiving lenders must give out.
Contains large mortgage loans
Sometimes, a mortgage that is forgiven is exempt from taxes, but much of the time, it is not. In fact, debt forgiveness could be really annoying with regards to forgiveness of a home loan. A 1099 C has to be used any time the lender agrees to reduce principle or agrees to a short sale.
Anybody in the Home Affordable Modification Program, or HAMP, could keep away from paying taxes on the reduction or modification of their home loan, according to a 2007 law called the Mortgage Forgiveness Debt Relief Act. It also helped people who were foreclosed on from dealing with additional taxes.
The Wall Street Journal explained that second home loans are not included. You can use any primary residence in the program though.
Talks saved it
Homeowners who are dealing with debt forgiveness for mortgages may have an easier time if claiming the amount over three years instead of all at once, which is one of the options. If you have not claimed it yet, you should do so now, so you can get the tax exemption. It will only be available 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 IRS in 2003, rising to 2 million by 2006 and almost 4 million in 2010. It's projected that in 2013, the Internal Revenue Service will get close to 6.5 million debt cancellation tax forms.
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