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Thread: 1099-c and insolvant?

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    Banned i.breathe.in's Avatar
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    1099-c and insolvant?

    well, since im settling my debts with b of a im getting a 1099-c form for the rest of the 20,000.00.

    i was reading up and it says something to the affect of that if your assets are not more then your debts that you can consider yourself insolvant and not pay taxes on the "earned income".

    since i have no assets but my car (paid off and needed) and im only claiming around 8 grand this year becuase i hardly worked can i file as insolvant?

    im gonna have a tax man do my taxes for me, but i want to make sure this is a good possibility ahead of time.

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    Default Re: 1099-c and insolvant?

    ^^^ assuming that the reported amount of 1099-c 'debt forgiveness' income is something less than $20,000, and with only $8,000 in additional income to report from other sources, odds are that you will fall below the threshold where you actually need to pay taxes. There's nothing in particular that needs to be done regarding being 'insolvent' ... your gross income will simply fall below the level where your personal exemption and standard deduction wipes out 100% of your income tax liability.

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    Default Re: 1099-c and insolvant?

    thanks mel!

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    Default Re: 1099-c and insolvant?

    How does this work... if your assets are not more than your debts???
    What about homeowners, or those that have begun their own business and have a high credit line?

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    Default Re: 1099-c and insolvant?

    ^^^ the 1099-c 'debt forgiveness' issue is not tied to a person's overall financial state. It is tied to one specific transaction. Where a home mortgage is concerned, if someone purchased a house for say $200,000 with no money down, and has paid perhaps only $10,000 towards the principal during the first few years of ownership, winds up being foreclosed on, with the house being sold at auction for say $120,000, from the bank's perspective $70,000 worth of the bank's assets were 'paid' to the homeowner. If the mortgage is 'closed' at that point, from the standpoint of the IRS, the bank will book that $70,000 as an expense ... and to balance, the homeowner must book that $70,000 as additional income (and pay additional taxes on that additional income).

    The same principle holds true for any sort of loan / debt where the account is 'closed' without the debtor making full repayment. The most straightforward example is a person running up a $10,000 credit card bill, and then 'settling' the delinquent credit card account for say a $4,000 cash payment. In this scenario, the person has received and spent $6,000 of tax free money in the form of credit card charges that were not paid back ... and that $6,000 will NEVER be paid back since the person and the credit card company have agreed to 'settle' and close the credit card account. At that point the IRS will expect the $6,000 of money paid from the credit card company to that person (which that person has already spent) to be declared as additional income, and will expect the person to pay income taxes on that $6,000 !

    In terms of actual tax liability, this is where that person's specific financial situation comes into the picture. If that person has little or no other income sources, then the taxes due on the additional 'debt forgiveness' income will probably be at a low percentage. However, if that person has significant other sources of income, then the taxes due will probably be at a significantly higher percentage. Also there is a double whammy effect because the additional 'debt forgiveness' income also increases the tax rate which applies to that person's other income sources via raising total income into a higher tax bracket.

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