Hello JA Customer,
Any time that a lender cancels or forgives a debt, such as a credit car balance, car loan, etc., the amount of the canceled debt is treated as taxable income to you. The lender reports the amount on a 1099-C form and you are required to report that as income on your tax return in the year the debt is canceled.
There are a couple of options for not having to pay tax on this canceled debt. One option is to have the debt discharged through a bankruptcy filing. The other option is to show that you were insolvent at the time the debt cancellation occurred. Showing you were insolvent means showing that your liabilities were more than your assets. If your liabilities were more than the value of your assets by at least the same amount of the canceled debt, then the entire debt can be excluded from your taxable income.
To claim an exclusion under the insolvency rules, what you would need to do is file an amended return for 2008 and file Form 982 with your amended return. You would also attach a statement listing your liabilities and assets to show how you arrived at your insolvency status.
If you cannot show insolvency and if the debt was not a debt discharged through bankruptcy proceedings, then you would be liable for taxes due on the amount of this forgiven debt.
Thank you JA Customer
Hello again JA Customer,
Exactly what type of debt did you have and how was the debt formally canceled by the lender? Do you have something in writing from the lender or other documentation to support it was canceled back in 2001?
it was a mastercard debt and I used a debt consolidation service and I have a letter from the lender dated 12/24/2001. The letter is from the lender stating:
This letter is to recognize the amount of $1420 on the behalf of Jim as a settlement paid in full. The money was actually sent on 1/24/02 of 1,420.00.
If the lender agreed to cancel the debt for less than the full consideration of what you owed, then the debt cancellation should have been reported in the year the lender agreed to that arrangement.
You should still file an amended return for the 2008 tax year since this is when the lender actually reported the forgiven debt. File form 982 with your amended return and include a statement that shows your basis for insolvency immediately before the debt was canceled, which would be as of 12/24/2001. Also include a copy of the letter from the lender dated 12/24/2001 which acknowledges they settled your account as of that date. This should alleviate you of having to pay taxes on this canceled debt.