Debt is tricky business, especially when tax time rolls around. Did you know that you might be liable for taxes on debts that were written off? Did you know that if someone owes you a debt it may be eligible to become a deduction? These are two very important aspects during tax season that could affect how much you owe the IRS or receive in a tax refund.
Cancellation Of Debt
The IRS requires that any debt over $600 that is written off or cancelled by a creditor be reported as income. This means that if you entered a debt negotiation and had any portion of your debt waived or eliminated by the lender, you are responsible for reporting that amount to the IRS. The IRS requires you to complete a Form 1099-C and file it along with your tax return for such debts. Cancelled mortgage debts as part of a deed in lieu or short sale have also been required to be reported to the IRS as well. However, a temporary bill enacted in 2007 is currently allowing homeowners to waive the reporting requirement, at least up until the end of 2012.
According to the IRS, debts that you are owed and have not received may be eligible to be converted into deductions. These debts are essentially considered a “loss” in comparison to reported income. If credit was extended to someone and a payment plan approved, any failure to collect this money is considered a bad debt. However, the burden of proof is one the consumer to prove the debt was not a gift. This allowance is what grants creditors and other loan agencies the ability to write-off debts that they cancel or eliminate on behalf of the consumer.