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Wed Dec 27, 2017, 12:02 AM

Question about taxes and debt settlement.

I am in the hopefully last stages of settling a huge amount of credit card debt I racked up over my entire lifetime. I paid off approximately 75% of it in full via debt consolidation until I literally couldn't do it anymore, but by then the minimum payments on all my cards were much more manageable. I got a call from a settlement company and entered a process to settle the remaining amounts for less than the total. They've been amazingly helpful and great and I have no problems with them.

I just got a letter from the IRS saying that I owe about $640 on my 2016 return because Citibank reported a debt-forgiveness on me of around $5000. I know you really can't fight the IRS, and I'll pay it if I need to, but it just seemed weird that they are taxing me for "income" that I didn't receive, and Citibank didn't receive. I guess it's projected profit that Citibank is writing off to lower their tax amount, but how are they taxing me on money that doesn't actually exist for me as income?

I just was curious if anyone had advice whether it's even worth it to talk to the IRS about this, or is this standard and I shouldn't waste time on it and just cough it up.

Thanks!

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Arrow 18 replies Author Time Post
Reply Question about taxes and debt settlement. (Original post)
forgotmylogin Dec 2017 OP
The Velveteen Ocelot Dec 2017 #1
SeaDoo77 Dec 2017 #14
Angry Dragon Dec 2017 #2
PoliticAverse Dec 2017 #3
elleng Dec 2017 #4
cbreezen Dec 2017 #5
elleng Dec 2017 #6
forgotmylogin Dec 2017 #10
cbreezen Dec 2017 #11
forgotmylogin Dec 2017 #12
cbreezen Dec 2017 #13
Cicada Dec 2017 #7
PoindexterOglethorpe Dec 2017 #8
A HERETIC I AM Dec 2017 #18
forgotmylogin Dec 2017 #9
progree Dec 2017 #15
forgotmylogin Dec 2017 #16
progree Dec 2017 #17

Response to forgotmylogin (Original post)

Wed Dec 27, 2017, 12:07 AM

1. The amount of a forgiven debt is taxed as income.

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Response to The Velveteen Ocelot (Reply #1)

Wed Dec 27, 2017, 01:09 AM

14. Unless Your Name Is Trump

 

Then your bankruptcy is just a ok.

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Response to forgotmylogin (Original post)

Wed Dec 27, 2017, 12:09 AM

2. It would not surprise me, I have no personal knowledge

I have heard that if you get a rebate say on car purchase that is also considered taxable income

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Response to forgotmylogin (Original post)

Wed Dec 27, 2017, 12:09 AM

3. Yes, forgiven credit card debt counts as income to you.

I would encourage you to contact the IRS taxpayer's advocate if you want more details or need some interest or penalty relief (perhaps you never received a 1099-C): https://www.irs.gov/taxpayer-advocate

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Response to forgotmylogin (Original post)

Wed Dec 27, 2017, 12:11 AM

4. Topic Number: 431 - Canceled Debt Is It Taxable or Not?

'If you borrow money and are legally obligated to repay a fixed or determinable amount at a future date, you have a debt. You may be personally liable for a debt or may own a property that's subject to a debt.'>>>

https://www.irs.gov/taxtopics/tc431

6 exceptions to paying tax on forgiven debt
https://www.creditcards.com/credit-card-news/six-exceptions-paying-tax-forgiven-debt-1282.php

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Response to forgotmylogin (Original post)

Wed Dec 27, 2017, 12:18 AM

5. The $640.00 is consdered income on your tax returns...

and, so you need to add it to your gross income (I believe). It sucks. You can thank Uncle Joe Biden for that one.

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Response to cbreezen (Reply #5)

Wed Dec 27, 2017, 12:21 AM

6. On what basis do you say,

'You can thank Uncle Joe Biden for that one?'

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Response to cbreezen (Reply #5)

Wed Dec 27, 2017, 12:38 AM

10. It was actually $5000-something in forgiveness.

The IRS did the math for me, and I owe them $640-something.

I am glad I'm in a position to pay it, and the debt management help I received is largely responsible for that.

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Response to forgotmylogin (Reply #10)

Wed Dec 27, 2017, 12:43 AM

11. Did you get a 1099 from the entity who forgave the debt? nt

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Response to cbreezen (Reply #11)

Wed Dec 27, 2017, 12:48 AM

12. No.

But all their mail is addressed to the settlement company. It's their bad if they didn't inform me, and I take responsibility for not being aware enough to check with them.

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Response to forgotmylogin (Reply #12)

Wed Dec 27, 2017, 01:02 AM

13. You should have recieved one.

It isn't your fault for not knowing it. All things being equal, you should have been properly notified.

This is just another reason why the powers that be didn't want Elizabeth Warren or Richard Cordray in charge of the CFPB.

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Response to forgotmylogin (Original post)

Wed Dec 27, 2017, 12:23 AM

7. You got purchases you did not pay for, thats income

There are some exceptions though. Search for debt cancellation exceptions. IRS probably has a publication.

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Response to forgotmylogin (Original post)

Wed Dec 27, 2017, 12:33 AM

8. Keep in mind that the $640 will be taxed at your marginal

rate, whatever that may be.

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Response to PoindexterOglethorpe (Reply #8)

Wed Dec 27, 2017, 10:26 PM

18. No, the $640 is the amount of tax owed.

The $5000 mentioned is the "income"

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Response to forgotmylogin (Original post)

Wed Dec 27, 2017, 12:36 AM

9. Thanks for the responses! I figured as much.

I'm going to check with the settlement company in case they have advice, but I figured that it would somehow be considered income that I'm responsible for. I just didn't want to spend time pursuing it needlessly if there was no point. I thank you all for knowing this and saving me a dig through the giant book of tax instructions to research it.

I understand this was my responsibility, but unfortunately, I didn't receive any kind of notice about it from Citibank or the Settlement company - SC instruction has always been "don't talk to your creditors, let us handle it fully." Likely SCs minor glitch for not notifying me; the IRS letter is the first I've even heard that I owed this. I'll pay it happily for the help and debt forgiveness I've received.

Thanks!

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Response to forgotmylogin (Original post)

Wed Dec 27, 2017, 01:40 AM

15. May I ask the name of the debt consolidation / settlement company?

From everything I've read and heard, the vast majority of them do little except collect fees for as long as possible. I'm very glad to hear there is one that actually helps. I have a friend that really could use some hope and help with loan consolidation. Thanks and good luck

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Response to progree (Reply #15)

Wed Dec 27, 2017, 10:31 AM

16. Sure, I know are a lot of them.

http://www.mykeycredit.com/

They're very small, and have been very approachable. They contacted me initially, and while I usually shun telemarketing, I followed up and they were very informative and nice on the phone, and have always been responsive to email questions, and had good answers to my questions like "How do you make money from this/what's in it for you?" (They charge me a monthly maintenance fee that is figured into the monthly payment I make to them in lieu of paying the creditors, and I am paying down a calculated full settlement fee less than the full amount - if they manage to negotiate lower than we planned for, that's bonus for them. My money goes into a savings account that is in my name and I can take control of at any time that they let build up and use to pay off settlements they negotiate. They're managing all the nuisance calls and letters from creditors from collections - they actually want the debt to be sold to collections because they can negotiate a better rate with them then they can with the actual creditors.)

I know it's possible to do debt consolidation/management/settlement on your own, but I would never have been able to put all the pieces together at once coherently without losing my mind.

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Response to forgotmylogin (Reply #16)

Wed Dec 27, 2017, 10:45 AM

17. Thanks!

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