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1099 C Cancellation of Debt - Understanding Tax on Forgiven Debts



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hi I'm licensed ed adjuster Damian

Falcone in this video we will discuss

something that can happen every time a

debt is negotiated this is commonly

referred to as tax on a forgiven debt or

discharge of indebtedness this is get

settled your source for consumer debt

settlement information as always for

even more information go to WWE and

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the IRS use money received as income in

the situation where the money received

is from a bank for a home loan or in the

form of credit card purchases the

taxable effect of the income is

cancelled when you repay the loan or

credit card if you never repay the loan

or credit card in their entirety

the IRS used the amount you didn't repay

as income and taxes it accordingly the

process normally goes something like

this

a debt is forgiven and a discharge of

indebtedness occurs the lender is

required to report the discharge of

indebtedness income to the IRS on form

1099 C and to the borrower the lender

should not and need not report forgiven

past due interest and fees as discharge

of indebtedness income but some lenders

do in the event the lender does include

amounts other than principle you should

attach a statement to the tax return

explaining the difference between the

1099 C supplied by the lender and the

correct calculation the lender may also

incorrectly report the entire debt is

forgiven

in many cases taxpayers may exclude the

discharge of indebtedness income from

their taxable income these are for

situations where you would be exempt

from the tax one the insolvency

exclusion the insolvency exclusion

applies when the homeowners liabilities

exceeded assets at the time the debt is

forgiven lower-income homeowners and

those with high debt loads are likely to

be more insolvent at the time

indebtedness is forgiven for example if

you have assets valued at $100,000 and

liabilities of two hundred thousand you

are insolvent in the amount of $100,000

and would not have to pay tax on the

first hundred thousand dollars forgiven

- forgiven interest and fees interest

and fees are not income and consequently

are not taxable 3 the bankruptcy

exclusion in the event you file for

bankruptcy protection you should check

with your attorney but it is very likely

this will prevent you from having to pay

this tax and for purchase fraud or

dispute a debt exclusion in the event of

purchase is deemed fraudulent or

that is disputed as valid you can be

exempt from paying this tax if you

qualify under one of these four

exemptions you should file Form 982 with

form 1040 and attach a detailed

explanation of why the income is

excluded normally the IRS will audit

people who they receive a 1099 C for

without receiving anything from the

borrower so be sure to file a Form 982

with your 1040 so in summation everyone

who negotiates a debt or has any portion

of a debt forgiven should receive a 1099

C form it is possible to avoid the tax

associated with a forgiven debt by

qualifying for one or more of the four

exemptions listed above if you think you

qualify you should include form 982 with

a detailed explanation with your 1040

form to the IRS in our next episode we

will discuss evaluating debt settlement

companies until then I'm Damian Falcone

and this is get settled

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