There are lots of complex areas in our tax law (I described a few in yesterday's post). One that is affecting many individuals due to our tough economic times is cancellation of debt, such as credit card debt. I'm quoted a few times in an article out today on this topic from CreditCards.com - "Many who qualify fail to take canceled debt tax exemption" by Connie Prater.
A few years ago, the IRS National Taxpayer Advocate's annual report to Congress noted this complexity issue. One suggestion offered by the NTA was to just exempt a certain dollar amount of cancellation of debt (COD) income. I think that makes sense because one possible way that someone could exclude the income would be if they are insolvent. Section 108 of the tax code allows for an exclusion of COD income to the extent of insolvency when forgiven. That can be a complex determination as you must total up the value of all of your assets and see if it is less than the amount of your debts. If yes, you can exclude up to the excess, BUT you must then reduce the basis of your assets by the amount excluded. If your assets are just your car and household items, this is a lot of recordkeeping and the likely result is that the reduced basis would still not produce a gain upon sale of the assets (because personal assets lose so much value while owned and used).
Take a look at the article - what do you think about these rules? How can they be simplified?
Subscribe to:
Post Comments (Atom)
2 comments:
Annette,
It is not intuitive for most that forgiven debt is income in the first place, let alone that there may be a credit that can be used to offset some or all of it.
Is it always the case the taxpayer will be notified they have "forgiven debt income"?
Debtors may not always be given a 1099-C because the lender may forget or fail to file it or the lender is not in a trade or business (such as for a loan from a friend (assuming it is a true loan and not a gift). For 1099C instructions, see http://www.irs.gov/pub/irs-pdf/i1099ac.pdf. Borrowers in tough financial problems may move and the 1099C doesn't reach them. In that case, the IRS will eventually send a notice (and bill). You are right that many borrowers don't think of the debt cancellation as being income because there is no receipt of cash at the time (that happened when they borrowed).
Post a Comment