Debt Shield Reminds Taxpayers to Report Canceled Debts

Executives at Debt Shield, a Maryland-based debt settlement firm, are reminding debt settlement clients that the IRS may consider their canceled debt taxable income.

Financial institutions that forgive or write off $600 or more of a debt's principal balance must send the taxpayer and the IRS a Form 1099-C because forgiven or canceled debt must be reported as income. Canceled debts subject to this law include debts remaining after foreclosure, property repossession or an unpaid credit card balance.

Taxpayers may not need to report the canceled debts as income if they were insolvent when the debt was canceled. Being insolvent simply means that the amount of their debts exceeded their assets. However, taxpayers can only exclude canceled debt up to the amount by which they were insolvent. So, if a taxpayer has $10,000 more debt than assets, the IRS requires the taxpayer to report any forgiven debt above that amount. For example, if you owe $20,000 in debt and are able to settle it for $11,000, the $9,000 in savings is not taxable income. If the savings would have been more than $10,000 in this example, for instance $10,500, then the $500 (amount above your $10,000 insolvency) would be taxable income in your tax bracket.

“Many of our clients are likely to be excused from paying taxes on forgiven debt due to IRS insolvency rules,” said Baylis. “However, when debt settlement clients do pay taxes on their canceled debt, the additional tax is small compared to the size of the debt – especially when you consider the 25 and even 35 percent interest credit card companies are charging struggling taxpayers.”

Taxpayers do not need to report debts that are canceled through bankruptcy.

The IRS requires insolvent taxpayers to submit IRS Form 982 with their tax returns if they are excluding canceled debt. However, taxpayers required to report canceled debt as income should use IRS Form 1090C, provided by each canceled debt’s creditor, to determine the amount to report as income. Baylis advises taxpayers to consult a professional tax preparer with questions about reporting requirements, but to refer to the IRS’s recently published list of tax scams, called the “Dirty Dozen,” before shopping around for tax help. Taxpayers can review the “Dirty Dozen” by going to www.irs.gov.

About Debt Shield, Inc.
Debt Shield, Inc., is a debt settlement company dedicated to helping consumers resolve their unsecured debt through mutually agreeable and discounted lump sum settlements in consideration of legitimate financial hardships. By helping consumers avoid bankruptcy, Debt Shield provides a service for both debtors and creditors. For more information about Debt Shield, call 1-888-397-7546 or visit the website at www.debtshield.com.