Is forgiven debt taxable income for you?


If you’ve received a surprise 1099-C tax form in the mail, you may be wondering if it’s taxable income for you. I want to explain.

The 1099-Cs popping up in people’s mailboxes are really fallout from the financial crisis over the last five years. Let’s say hypothetically you lost your job three years ago and couldn’t pay off your $3,000 credit bill so it was charged off by the credit card company. Now you’re getting the tax form for the $3,000 they wrote off.

The law requires that lenders must report your charged-off debt as income to you. You have to report this on your income tax. But are you responsible for it as taxable income? Maybe not.

  • With foreclosures, in most cases, it is not taxable. The only way it would be taxable is if you did a cash-out refi at some point and then walked away and your house went into foreclosure. The cash-out money you got would then be taxable. But if you just took out a mortgage to buy a home and then foreclosed, that is not taxable.
  • For credit cards, if you were essentially insolvent at the time your debt was written off, the IRS has a form for you to attach to your return where you zero out that 1099. It’s your way of basically saying, “Hey, look I was broke!” Then you’re not responsible for the paying tax on it.

The idea here is if you had money and chose not to pay, then it’s taxable. But if you didn’t have any money or didn’t get any money out of the deal, then it’s not taxable.

I know it’s confusing, but whatever you do, don’t ignore a 1099-C! Because if you do the IRS will send you a tax due bill in the future, plus interest, plus penalties. It’s very hard at that point to get out of what may not have been a legal obligation for you in the first place.

Meanwhile, if you’re curious about the H&R Block Second Look program, know that it is a legitimate thing. You take your tax return for a prior year to them and they claim that close to two-thirds of the time they will find you paid too much tax. It’s free to see if you are due money back that you didn’t know to ask for. Then if you want them to file a new return, you pay them for the new return and you get that refund.

It’s a win/win for you and for H&R Block!

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