Lenders can forgive debt in some situations, if a borrower reaches the correct agreement. However, debt forgiveness can become a major frustration come tax season.
Government taking debt forgiveness
When a loans lender decides to forgive debt, it is called debt relief or debt cancellation. People love it when this happens. It typically is forgiven as long as the person pays part of the debt.
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 pardoned 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.
Involves large home loans
If a bank agrees to a short sale on your house or a reduction in principle, that has to be reported on a 1099 C for tax purposes, though occasionally you can get exempt from taxes on it. Home loan forgiveness can be a pretty big chunk of change that you then get taxed on.
In 2007, the government passed a law exempting certain foreclosed-on homeowners from a portion of this debt. The law, the Home loan Forgiveness Debt Relief Act, also extends, according to CBS, to people who took part or are participating in the Home Affordable Refinancing Program or HAMP, who received a principle deduction or other modification that would otherwise be matter to the tax.
It does not contain any second-home home loans, though it does consist of all primary residences, according to the Wall Street Journal.
Will be a frustration next year
When the fiscal cliff negotiations were happening, it integrated the program. It will still expire in 2014 unless extended though. Homeowners should take advantage of claiming the pardoned home loan right now if they can to avoid paying taxes on it. Pardoned homeowners do have three years to pay the taxes, so at least there is there.
Creditcards.com explained that people are getting more debt forgiveness now more than ever. In fact, it is expected that the IRS will get 6.5 million 1099 C forms in 2013. In 2003, there were only about 1 million forms filed for debt forgiveness.
Government taking debt forgiveness
When a loans lender decides to forgive debt, it is called debt relief or debt cancellation. People love it when this happens. It typically is forgiven as long as the person pays part of the debt.
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 pardoned 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.
Involves large home loans
If a bank agrees to a short sale on your house or a reduction in principle, that has to be reported on a 1099 C for tax purposes, though occasionally you can get exempt from taxes on it. Home loan forgiveness can be a pretty big chunk of change that you then get taxed on.
In 2007, the government passed a law exempting certain foreclosed-on homeowners from a portion of this debt. The law, the Home loan Forgiveness Debt Relief Act, also extends, according to CBS, to people who took part or are participating in the Home Affordable Refinancing Program or HAMP, who received a principle deduction or other modification that would otherwise be matter to the tax.
It does not contain any second-home home loans, though it does consist of all primary residences, according to the Wall Street Journal.
Will be a frustration next year
When the fiscal cliff negotiations were happening, it integrated the program. It will still expire in 2014 unless extended though. Homeowners should take advantage of claiming the pardoned home loan right now if they can to avoid paying taxes on it. Pardoned homeowners do have three years to pay the taxes, so at least there is there.
Creditcards.com explained that people are getting more debt forgiveness now more than ever. In fact, it is expected that the IRS 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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