Debt forgiveness may be taxable
Negotiating with a lender to cancel part or all or part of a debt is considered income by the IRS
With many Michigan families struggling financially, one way of trying to make ends meet is to negotiate with creditors. By reducing the amount of debt owed, families are able to reach agreement on payment plans they can afford. Creditors are usually willing to negotiate a payment plan as they are happier receiving some payment rather than no payment. If you had credit card debt forgiven last year, you should be aware that you must file this as income on your tax forms
People must pay taxes on any forgiven debt more than $600, according to the IRS. Lenders must report the amount of the cancelled debt on Form 1099-C. If you received debt relief last year, your lender should have mailed you this form which shows the amount forgiven and the original debt amount.
Why is it counted as taxable income? When the money was borrowed it was not taxable because there was a promise to pay it back. After the debt is renegotiated the obligation to pay the entire debt is no longer in place but that does not eliminate the fact that you received the loan.
Review the Form 1099-C for accuracy. Financial institutions have issued 1099-C’s for debts they have not tried to collect on or issued duplicate forms for the same debt.
If your you and your family or someone you know is struggling with creditors there are resources available to help you. It is difficult to talk about money problems, and it is hard to put your situation into words when dealing with creditors. The Michigan State University Extension website MI Money Health has many tips and sample letters to write creditors. Families must be honest about their situation and have a reasonable plan they can afford. Also, it is important to get any agreement in writing.
You may not have thought you needed to report non-mortgage debt forgiveness, but you do. Mortgage tax forgiveness will be covered in another news article, Mortgage debt forgiven not considered taxable income.