If you receive a 1099 for canceled or forgiven debt, you may be required to pay taxes on that debt.
Here's what you need to know:
- If your credit card company wrote off your debt because it was uncollectible after a certain amount of time, you may be required to pay taxes on the debt.
- If your home was sold in foreclosure but had a deficit balance on the mortgage which was forgiven by the mortgage company you may need to pay taxes to the IRS on the forgiven portion of that debt.
- The same rule could apply for other types of debts which are written off and reported to the IRS. Any portion of the debt that was forgiven is taxable under the current tax laws. The IRS requires that all banks and financial institutions report any canceled or forgiven debt to them because they consider it income.
- If your debts were forgiven in Chapter 7 bankruptcy or Chapter 13 bankruptcy , you DO NOT need to pay taxes to the IRS on the forgiven debt. Debts canceled or forgiven in bankruptcy are not taxable. However, sometimes a creditor will still issue a 1099 for a canceled debt. If you receive a 1099 for a debt that was discharged in you bankruptcy, you need to fill out the IRS Form 982. The form is complicated but an experienced tax accountant can fill it out for you and make sure that you are not taxed on debt which was discharged in bankruptcy.