Debt forgiveness is a great thing for a lot of people, as it means less than the whole of a debt has been compensated though the debt has been happy. However, it's considered taxable income and the mistake of a debt forgiveness tax break for foreclosures or short sales of houses is set to bite some working class individuals.
Counts as income
Millions of people breathe sighs of relief yearly when granted debt forgiveness. Also called debt relief, debt cancellation, it's where a loans lender of some sort, like a charge card business, home loan lender or whomever, agrees to forgive a debt if the borrower agrees to pay off a portion, typically 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.
Ergo, it's taxable and forgiving lenders have to provide a tax form, a 1099 C, that consumers have to report on tax forms.
Think about your home loan
Sometimes, a home loan that is forgiven is exempt from taxes, but much of the time, it is not. In fact, debt forgiveness could be really annoying when it comes 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.
In 2007, the government passed a law exempting certain foreclosed-on homeowners from a portion of this debt. The law, the Mortgage Forgiveness Debt Relief Act, also extends, according to CBS, to people who participated or are participating in the Home Affordable Refinancing Program or HAMP, who received a principle deduction or other refinancing that would otherwise be topic to the tax.
However, according to the Wall Street Journal, it only applies to mortgage loans to "buy, build or improve" a primary residence. Second-home mortgages are not eligible, so in your yuppie faces.
Looking at expiration expectations
Homeowners who are dealing with debt forgiveness for mortgage loans 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 Internal Revenue Service in 2003, rising to 2 million by 2006 and almost 4 million in 2010. It's projected that in 2013, the IRS will receive close to 6.5 million debt cancellation tax forms.
Counts as income
Millions of people breathe sighs of relief yearly when granted debt forgiveness. Also called debt relief, debt cancellation, it's where a loans lender of some sort, like a charge card business, home loan lender or whomever, agrees to forgive a debt if the borrower agrees to pay off a portion, typically 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.
Ergo, it's taxable and forgiving lenders have to provide a tax form, a 1099 C, that consumers have to report on tax forms.
Think about your home loan
Sometimes, a home loan that is forgiven is exempt from taxes, but much of the time, it is not. In fact, debt forgiveness could be really annoying when it comes 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.
In 2007, the government passed a law exempting certain foreclosed-on homeowners from a portion of this debt. The law, the Mortgage Forgiveness Debt Relief Act, also extends, according to CBS, to people who participated or are participating in the Home Affordable Refinancing Program or HAMP, who received a principle deduction or other refinancing that would otherwise be topic to the tax.
However, according to the Wall Street Journal, it only applies to mortgage loans to "buy, build or improve" a primary residence. Second-home mortgages are not eligible, so in your yuppie faces.
Looking at expiration expectations
Homeowners who are dealing with debt forgiveness for mortgage loans 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 Internal Revenue Service in 2003, rising to 2 million by 2006 and almost 4 million in 2010. It's projected that in 2013, the IRS will receive close to 6.5 million debt cancellation tax forms.
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