Income Taxing 1099s
By Dian Vujovich
If you’re waiting until the last day to file your tax return, make sure you don’t overlook any of the those pesky income-related 1099 forms. There are way too many around these days–like about a dozen—and not counting the income they reflect could make for problems.
Like it or not, unemployment checks are taxable, so are grant monies and a host of other income sources the gov may have sent your way. The form not to over look in those two instances would be the 1099-G one.
Decide to settle on your credit card debt for a fraction of the total amount due and while that may have saved you an out-of-pocket bundle, the difference between what was owed and what was paid in the settlement is taxed as ordinary income. How they, whoever the they’s are, came up with that one is baffling but it’s a fact. The 1099 form here that could raise your income tax bracket is 1099-C.
From http://www.convey.com: “Form 1099-C is received if there has been a cancellation of debt, as from a bankruptcy proceeding, credit card default, or other failure of a borrower to pay a debt that the lender can use as a tax deduction.” Ugh.
Here’s how financial pro and columnist Terry Savage answered a question about 1099-Cs:” Q:I managed to negotiate with the bank to lower my credit card balance by $9,000, and then I paid off the remaining amount last year. Now I just received some kind of income tax form sent by the card company. Does this mean I owe taxes?
“A. These tough economic times have brought with them an array of tax benefits — and some tax burdens that most people haven’t faced before. I’m afraid you’ve fallen into one of the pitfalls: the tax on “canceled debt.”
“The form you received is form 1099-C (for cancellation of debt). And yes, the amount of consumer debt that was forgiven is considered “income” for purposes of taxation. You’ll have to add that amount to any other income (or unemployment benefits) you received in 2009, in order to determine your tax liability.
“Depending on your total income, you could owe as much as one third of this amount in income taxes.
“It doesn’t seem “fair” — but that’s the law. And you’re not alone. According to the IRS, more than 2.5 million people will be receiving similar forms, informing them they owe income taxes on forgiven debt. These forms apply to consumer debt such as credit cards and car loans that were forgiven.
“But there’s a bright spot. This tax is no longer applicable to those who have residential real estate debt that was either re-structured or written off by the bank during a foreclosure. The Mortgage Forgiveness Debt Relief Act of 2007 specifically exempts up to $2 million of debt that is discharged or forgiven on a primary residence. The exclusion applies only if the mortgage debt was written off because of a decline in the value of the home, or in the taxpayer’s “financial condition.”
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