Unlike a short sale, which currently any settlement made until 2012 the difference between the amount owed and the amount the home sells for is forgiven, the settlement amount on the credit is not. Be ready to pay income tax on the amount of the forgiven credit card debt.
It is law that credit card companies send you and the IRS a 1099-C form reflecting the amount of the forgiven debt. This is money that you will owe income tax on. here is currently no tax break on credit card settlements. The exception to this rule however, is if you are insolvent. This means the amounts of all your liabilities are more than the value of your assets. If the forgiven debt is reported to the IRS on a form 1099, it is best you attach a note to your tax return giving a full explanation of the insolvency. Otherwise, it is likely to trigger an automatic audit because the income reported on the 1099 does not appear on your tax return. Be ready with documentation to back up your claim that at the time the debt was forgiven your liabilities exceeded the fair market value of your assets. You should see your tax advisor to help guide you in this situation.
It is law that credit card companies send you and the IRS a 1099-C form reflecting the amount of the forgiven debt. This is money that you will owe income tax on. here is currently no tax break on credit card settlements. The exception to this rule however, is if you are insolvent. This means the amounts of all your liabilities are more than the value of your assets. If the forgiven debt is reported to the IRS on a form 1099, it is best you attach a note to your tax return giving a full explanation of the insolvency. Otherwise, it is likely to trigger an automatic audit because the income reported on the 1099 does not appear on your tax return. Be ready with documentation to back up your claim that at the time the debt was forgiven your liabilities exceeded the fair market value of your assets. You should see your tax advisor to help guide you in this situation.
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