Articles Tagged with Debt Forgiveness

mort debt relief act expiredMississippi homeowners who suffer a foreclosure or who sell their home at a loss will not be able to use the Mortgage Forgiveness Debt Relief Act to exclude taxes on the “forgiven” or “canceled” debt from the loss.  The Act expired at the end of 2013.  Debt that is reduced by mortgage modifications also qualified for the relief.  Forgiven debt or canceled debt is any debt that is wiped away or written off.  Forgiven debt is considered taxable income by the IRS and you will now have to pay taxes on this money.

The Mortgage Forgiveness Debt Relief Act created an exception that allowed taxpayers to exclude this income.

Any debt modified or discharged in bankruptcy is not considered income and is not subject to payment of taxes.  Since the Mortgage Forgiveness Act has now expired, filing bankruptcy or using the Internal Revenue insolvency exception is the only way to get rid of this income and not be required to pay taxes on the forgiven debt.

If you are a self-employed worker you will receive a 1099 for your wages instead of a W-2 form. But there is another type of 1099 that you may receive from one of your creditors. This is form 1099C.  A 1099C form is used when all or a portion of a debt is canceled or forgiven by the creditor. If the amount exceeds $600.00 a creditor must report this debt forgiveness to the IRS. The IRS counts the forgiven or cancelled debt as income that must be reported on your tax return.

You should receive a copy of the 1099C form in the mail from your creditor(s) when they file the form with the IRS.  You may not have gotten a copy. If not, the IRS will send you a notice stating you failed to include income on your tax return as a result of a creditor filing the 1099C form. Now you owe taxes, penalties and interest on the amount.

But wait, there are reasons why you may not have to pay taxes on this canceled debt. Here are some of the exceptions listed in IRS Publication 4681 that would relive you of the taxes, penalties and interest.