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Getting your debt forgiven? Surprise ... it's taxable

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Newsjock Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-20-06 12:38 AM
Original message
Getting your debt forgiven? Surprise ... it's taxable
http://seattlepi.nwsource.com/money/281828_singletary19...

By MICHELLE SINGLETARY
SYNDICATED COLUMNIST

If you're working with a creditor to forgive some of your debt, there's something important you should know.

Any debt that is canceled could create another bill -- a tax bill.

... Cohen remembers one client he tried to help after her consulting business failed. The woman had been living on her credit cards and eventually amassed about $30,000 in debt. She was able to negotiate that debt down to about $10,000, Cohen said.

But the cancellation of debt created a $5,000 federal tax bill.

"When I told her she would have to pay taxes on the $20,000 that was forgiven, she was absolutely flabbergasted," Cohen said. "She was just completely upset. She just ran out of the office. She didn't even pay me."

Cohen and other experts say borrowers often aren't aware of the tax implications of debt cancellation, which can also trigger a state tax debt.

more
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dorktv Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-20-06 12:40 AM
Response to Original message
1. This is horrible. :(
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skids Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-20-06 12:44 AM
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2. Coming and going...

I wonder how much tax the government makes off allowing the dollar to fall in value -- anyone on the other side of the equation who is saving who manages to find a way to protect their assets from inflation has to pay tax on the interest. Not that interest should not be taxable, since many of the more savvy investors actually get more than a CLA for their savings from their funds, but perhaps the tax should carry a CPI-based exemption.

And not that taxes are a bad thing -- just I don't think there should be an incentive for the government for either people going bankrupt or for devaluing the dollar. I suppose in the latter case we'd also have to address govt dollar-denominated debt.



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NYC Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-20-06 12:48 AM
Response to Original message
3. Forgiveness of debt
was always taxable income to corporations.

(Maybe not always, but it was 30 years ago.)
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ashling Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-20-06 01:00 AM
Response to Original message
4. Been there
If the company rights it off as a loss on their taxes, the IRS will view it as income to you.

Pretty much sucks.
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demosincebirth Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-20-06 01:03 AM
Response to Original message
5. Yes sir, if you forgive someone their debt and you claim it as
a loss, the debter has to claim it as income on their tax return.
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Deja Q Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-20-06 01:04 AM
Response to Original message
6. A long standard practice; I looked that up in 2002...
And unlike credit cards, the money the government wants has to be paid back pronto.

In the end, there's very little difference in what the person owes. Only who gets owed changes - and not completely, either.

And it's a big nasty mark on the credit record too.

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Lars39 Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-20-06 01:04 AM
Response to Original message
7. I had no idea.
We filed for Ch13 right before the deadline. :(
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Zomby Woof Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-20-06 01:25 AM
Response to Original message
8. Nothing new
This has been tax law for years. I worked for the IRS back in 1998 (but it was the law well before then), and dealt with these questions. It gets reported on a 1099-C, the 'C' stands for 'Cancellation of Debt'. Since there is no withholding, it results in a large tax bill, but that is always payable with an installment plan - which probably has terms more generous than the original debt in the first place.
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Trajan Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-20-06 04:03 AM
Response to Original message
9. Something never mentioned about George W. Bush
When his corporate 'loan' was forgiven at Harken: Did he pay taxes on that 'income' ? ...

WHY O'WHY has no one (else) thought about this ? ....

No one ever listens to me ....

WHAAAAA ! ...
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