Debt forgiveness is an excellent thing. A lender that chooses to forgive some portion of one's loans is good, but it comes with a caveat. The problem is that the forgiven debt is handled and taxed as income by the Internal Revenue Service, which will hurt come tax time.
Adds up as income
Millions of people breathe sighs of relief annually when granted debt forgiveness. Also called debt relief, debt cancellation, it's where a loans lender of some sort, like a credit card company, home loan lender or whomever, agrees to forgive a debt if the borrower agrees to pay off a portion, generally on a condensed payment schedule.
Then they get the bad news which is, according to the Wall Street Journal, that debt forgiveness is taxable income. The way it works is that since the portion that's forgiven is technically a bonus toward one's personal petty cash, that's income.
Consumers have to report the cash on their tax forms with the form 1099 C, which forgiving lenders must give out.
A couple hundred thousand in a mortgage
Debt forgiveness taxes can be a real kick in the nether regions when linked to mortgages. When a home loan lender forecloses on a house and either forgives the debt, reduces the principle or agrees to a short sale, the fair industry value and forgiven debt for the home have to be reported on a 1099 C. However, the tax on it, for some, is exempted for the time being.
The Home loan Forgiveness Debt Relief Act is a law that the government passed in 2007 that allows certain homeowners who get foreclosed on to avoid the taxes on the debt. CBS explained that people who were in the Home Affordable Modification Program, or HAMP, were able to avoid the tax.
It does not include any second-home home loans, though it does contain all primary residences, according to the Wall Street Journal.
Will be a frustration next year
That law was set to expire last year, but was saved in the "fiscal cliff" negotiations. However, it will lapse before 2014, unless extended. That said, as CBS points out, debt forgiveness for mortgage loans could be claimed over a period of three years or all it once - forgiven homeowners who haven't claimed it yet should claim it all this year and reap the benefit of the exemption, if applicable.
Creditcards.com explained that people are getting more debt forgiveness now more than ever. In fact, it is anticipated that the Internal Revenue Service will get 6.5 million 1099 C forms in 2013. In 2003, there were only about 1 million forms filed for debt forgiveness.
Adds up as income
Millions of people breathe sighs of relief annually when granted debt forgiveness. Also called debt relief, debt cancellation, it's where a loans lender of some sort, like a credit card company, home loan lender or whomever, agrees to forgive a debt if the borrower agrees to pay off a portion, generally on a condensed payment schedule.
Then they get the bad news which is, according to the Wall Street Journal, that debt forgiveness is taxable income. The way it works is that since the portion that's forgiven is technically a bonus toward one's personal petty cash, that's income.
Consumers have to report the cash on their tax forms with the form 1099 C, which forgiving lenders must give out.
A couple hundred thousand in a mortgage
Debt forgiveness taxes can be a real kick in the nether regions when linked to mortgages. When a home loan lender forecloses on a house and either forgives the debt, reduces the principle or agrees to a short sale, the fair industry value and forgiven debt for the home have to be reported on a 1099 C. However, the tax on it, for some, is exempted for the time being.
The Home loan Forgiveness Debt Relief Act is a law that the government passed in 2007 that allows certain homeowners who get foreclosed on to avoid the taxes on the debt. CBS explained that people who were in the Home Affordable Modification Program, or HAMP, were able to avoid the tax.
It does not include any second-home home loans, though it does contain all primary residences, according to the Wall Street Journal.
Will be a frustration next year
That law was set to expire last year, but was saved in the "fiscal cliff" negotiations. However, it will lapse before 2014, unless extended. That said, as CBS points out, debt forgiveness for mortgage loans could be claimed over a period of three years or all it once - forgiven homeowners who haven't claimed it yet should claim it all this year and reap the benefit of the exemption, if applicable.
Creditcards.com explained that people are getting more debt forgiveness now more than ever. In fact, it is anticipated that the Internal Revenue Service will get 6.5 million 1099 C forms in 2013. In 2003, there were only about 1 million forms filed for debt forgiveness.
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