Lenders can forgive debt in some situations, if a borrower reaches the best agreement. However, debt forgiveness can become a major headache come tax time.
Not so great news from the federal government
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 credit card business, home loan lender or whomever, agrees to forgive a debt if the borrower agrees to pay off a portion, usually on a condensed payment schedule.
Then they get the not so great 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.
The lenders will then give form 1099 C to the borrower, so they can report it on their taxes during the year.
Looking at mortgage forgiveness
Debt forgiveness taxes can be a real kick in the nether regions when connected to mortgages. When a home loan lender forecloses on a house and either forgives the debt, reduces the principle or agrees to a short sale, the fair market value and forgiven debt for the home have to be reported on a 1099 C. However, the tax on it, for some, is excused for the moment.
The Mortgage Forgiveness Debt Relief Act is a law that the government passed in 2007 that allows certain homeowners who get foreclosed on to stay away from the taxes on the debt. CBS explained that people who were in the Home Affordable Refinancing Program, or HAMP, were able to avoid the tax.
The Wall Street Journal explained that second mortgages are not incorporated. You can use any primary residence in the program though.
Last year expiration
Homeowners who are dealing with debt forgiveness for mortgages may have an easier time if claiming the amount over three years rather than all at once, which is one of the options. If you have not claimed it yet, you need to 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.
Creditcards.com explained that people are getting more debt forgiveness now more than ever. In fact, it is anticipated that the Internal Revenue Service will get 6.5 million 1099 C forms in 2013. In 2003, there were only about 1 million forms filed for debt forgiveness.
Not so great news from the federal government
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 credit card business, home loan lender or whomever, agrees to forgive a debt if the borrower agrees to pay off a portion, usually on a condensed payment schedule.
Then they get the not so great 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.
The lenders will then give form 1099 C to the borrower, so they can report it on their taxes during the year.
Looking at mortgage forgiveness
Debt forgiveness taxes can be a real kick in the nether regions when connected to mortgages. When a home loan lender forecloses on a house and either forgives the debt, reduces the principle or agrees to a short sale, the fair market value and forgiven debt for the home have to be reported on a 1099 C. However, the tax on it, for some, is excused for the moment.
The Mortgage Forgiveness Debt Relief Act is a law that the government passed in 2007 that allows certain homeowners who get foreclosed on to stay away from the taxes on the debt. CBS explained that people who were in the Home Affordable Refinancing Program, or HAMP, were able to avoid the tax.
The Wall Street Journal explained that second mortgages are not incorporated. You can use any primary residence in the program though.
Last year expiration
Homeowners who are dealing with debt forgiveness for mortgages may have an easier time if claiming the amount over three years rather than all at once, which is one of the options. If you have not claimed it yet, you need to 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.
Creditcards.com explained that people are getting more debt forgiveness now more than ever. In fact, it is anticipated that the Internal Revenue Service 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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