Nothing is Certain but Debt and Taxes

Your credit card company may have forgiven that debt, but the IRS hasn't. USA Today reports on some sunshiny recession news, if you are an IRS agent:

Debt that is canceled or forgiven is considered taxable income, something many borrowers don't realize until they receive a 1099-C tax form from their lender. TheIRS projects that creditors will send taxpayers 6.4 million 1099-Cs in 2012, up from 3.9 million in 2010.

The increase likely reflects the rise in credit card defaults during the economic downturn, says Gerri Detweiler, personal finance expert for Credit.com. Moody's Investor Service estimates that the nation's six largest credit card companies wrote off more than $75 billion in uncollectible balances in 2009 and 2010…..

Why, the taxes due on that $75 billion might be able to pay for our entire domestic law enforcement portion of our drug war! (Or any number of other damaging, stupid federal initiatives.)

Taxpayers who receive a 1099-C, which is also submitted to the IRS, are liable for the tax bill unless they can prove that the debt was discharged in bankruptcy or that they were insolvent when the debt was canceled, says Jennifer MacMillan, an enrolled agent in Santa Barbara, Calif.

Shelley Cartier, 48, of Austin, recently received a 1099-C for a credit card debt that was more than 20 years old. Cartier says she filed for bankruptcy in the early 1990s but no longer has the paperwork to prove the debt was discharged. Numerous calls to the financial institution have gotten her nowhere, she says.

"I can't file my taxes until I get it cleared up," Cartier says.

Making matters worse, a significant number of 1099-Cs contain errors, says IRS Taxpayer Advocate Nina Olson. Treasury regulations encourage financial institutions to issue 1099-Cs for debts if they haven't tried to collect them in at least 36 months, even if the debts haven't been forgiven, she says. In other cases, taxpayers have received duplicate 1099-Cs for the same debt, she says.

The number of 1099-Cs could rise even more if a tax exemption for canceled mortgage debt expires at the end of this year. Legislation enacted in 2007 excludes mortgage debt on a principal residence that was forgiven as a result of a loan modification, short sale or foreclosure. If the exemption isn't extended, thousands of homeowners who owe more than their homes are worth could be on the hook for taxes….

Government: Always there to help the little guy.

Comments

[Comedian]

Taxpayers ... are liable for the tax bill unless they can prove that ... they were insolvent when the debt was canceled

Timing is everything.

[Kwanzaa Cake]

And how about all those homeowners who are benefitting from government-induced reductions in the principal amounts of their mortgages? Let me guess, they bought at the peak, are now underwater, are getting the government-induced benefit of a mortgage writedown, and are also getting a tax break that will not increase their tax liability by the amount of the debt forgiveness.

[Bob]

WTF? How is debt that is not paid back income? When did the congress critters sneak this into the tax code?

[John Thacker]

Seems rather obvious. The lender is giving you money to pay off the debt.

Your objection is more in the idea that when money is moved from one hand to another, that transaction should be taxed.

[T]

I'm okay with this only if the lender is booking it as income. If they're claiming a loss on it, and taking the tax break for doing so, then I shouldn't be on the hook for the taxes on an imaginary transaction that doesn't involve me in the slightest.

[Tim Cavanaugh]

Why would the lender be booking it as income? For the lender it's outgo. The borrower is the one who's getting a financial benefit that the IRS (rightly or wrongly) considers income.

[johnl]

The tax man needs to be made whole. The bank takes a loss means you made a windfall. They get a writeoff you get income. Just like when you deduct your mortgage, they pay taxes on the income.

[GW]

The real kicker is that they still get to wreck your credit, because it's a write off. But you get taxed on the money like they gave you the cash. You get screwed coming and going.

Many a person has been surprised when they cut a deal with a credit card company to pay a portion of the balance owed, to which the creditor the agrees that the debt is settled.

Then they still get hammered on their credit report, and the 1099 shows up at the end of the year for what was "forgiven". Nice racket.

The best thing to do is do what I did, and tell them to go piss up a rope over the whole balance.

[Stormy Dragon]

The real kicker is that they still get to wreck your credit, because it's a write off. But you get taxed on the money like they gave you the cash. You get screwed coming and going.

It's like they're trying to discourage people from not paying back debts or something!

[Brandon]

This is not news. How is debt that is not paid back NOT income?

[Tim Cavanaugh]

As long as income is taxed in this open-air prison, I have no problem with deadbeats still being on the hook for the financial considerations they have received from their creditors.

[CrackertyAssCracker]

If you are OK with the income tax, then you have to be OK with considering forgiven debt as income. Otherwise, you'd never pay for anything, you'd just make a loan and forgive the debt.

[Red Rocks Rockin]

WTF? How is debt that is not paid back income? When did the congress critters sneak this into the tax code?

I believe it's considered the equivalent of a gift, similar to when Oprah bought everyone in her audience a car one day a few years ago. They ended up being liable for the taxes on the car, even though they didn't buy it.

[Paul]

Will Obama step in and suggest some sort of Student Tax Debt Relief?

Oh, that money is owed to him. Never mind.

[Stormy Dragon]

Numerous calls to the financial institution have gotten her nowhere, she says.

She's suprised that an institution of which she's no longer a customer, and which she apparently stiffed on a significant debt, doesn't seem interested in spending a lot of time helping her resolve an issue they really have nothing to do with?

[Red Rocks Rockin]

The same thing is going to apply to student loan forgiveness when it kicks in. A lot of people doing this minimum/income adjusted payment stuff are going to be shocked when they get a tax bill for an extra five figures of income.

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