Found an issue on this page? Let us know and we will look into it as soon as possible.
Debt forgiveness and income taxes
Anonymous4 views4 answers
If you make a deal with a credit card company for debt forgiveness, you agree to pay off a portion of the debt and they'll forgive the rest. Much of that forgiveness could be interest and penalties tacked on by the company. The credit card company, writes it off as a loss, even though it's all on PAPER, created by them....YET, the forgiven part is counted as REAL income to you and is taxable, even though you didn't receive any real income. How can the bank write off a paper loss and you get charged for a paper penalty? What am I missing here?
Michael Raymond DaymudeLitigation LawyerSherman Oaks, CA ·
The tax code and its interpretation as applied to cancellation of debt income. See tax topic on the IRS website: http://www.irs.gov/taxtopics/tc431.html
You're asking a great question. And not that the answer will make you feel any better either. The interest and penalties that are "unpaid" are added to the loan balance under the terms of the contract. If they're not paid, they are owed but are unpaid so the bank "extends" additional credit to cover these as well. As a result, the penalties and interest, while the bank has never actually spent them, has loaned them so when they're forgiven, they become "income" to you. There are ways of addressing this partially but that's my take on the answere.
In an implicit sense, you receive income to cover the penalties and interest. However, if you were insolvent, meaning your liabilities exceeded your assets, at the time of discharge you can exclude this income using a Form 982 with your return.
Christopher Larson
Insight Law
Tax Attorney - Bellevue, Everett, Seattle
Tax Attorney - Bellevue
Tax Attorney - Everett
Tax Attorney - Federal Way
Tax Attorney - Kirkland
Bellevue IRS Contact
Seattle Bankruptcy Attorney
Seattle Chapter 7 Bankruptcy Attorney
Seattle Chapter 13 Bankruptcy Attorney
Bellevue Estate Planning Attorney
Randall Scott JacksonBusiness AttorneyPalm Desert, CA ·
You can be taxed on the money you borrowed but aren't paying back. When you borrowed the money, you agreed to pay interest and penalties. That debt is on paper but it is real.
If the total of your debts is bigger than the value of your assets, it is possible that you won't owe taxes on the forgiven portion. Talk with a tax adviser regarding the involvency exception to the forgiveness of indebtedness rule.
