Debt settlement question

[sanityjones]

I recently settled a debt which had gone to collections. I ended up paying about 60% of the original debt. The other day I received in the mail a 1099 for the difference between the original debt and the settlement of the debt (40%). Is this a common practice?

[bookcrazychick]

Yes, the forgiven part may also be taxable to you.

[sanityjones]

Does this mean that the company did not write off this amount as a loss, (thus creating a deduction for them), or that their deduction is now my income and my tax burden in order to balance the books in the larger sense? Also, a portion of that 40% would have been interest payments and technically been a write off form me..........................

[Deleted]

Feb 1, 2011 16:57:12 GMT -5 @sanityjones said:

Does this mean that the company did not write off this amount as a loss, (thus creating a deduction for them), or that their deduction is now my income and my tax burden in order to balance the books in the larger sense? Also, a portion of that 40% would have been interest payments and technically been a write off form me..........................

The company did write off the amount and it would be an expense, or deduction, to the business.

[nancy65]

Feb 1, 2011 16:57:12 GMT -5 @sanityjones said:

Does this mean that the company did not write off this amount as a loss, (thus creating a deduction for them), or that their deduction is now my income and my tax burden in order to balance the books in the larger sense? Also, a portion of that 40% would have been interest payments and technically been a write off form me..........................

Was this home mortgage debt? Or business debt? Or personal debt such as credit cards? Different rules apply in different situations.

[Opti]

Feb 1, 2011 11:05:51 GMT -5 bookcrazychick said:

Yes, the forgiven part may also be taxable to you.

What she said. I believe if the 1099 amount is less than $600 you do not have to report as income but if it is $600 or greater you do. Just one of the many ways the IRS brings in money.

[MN-Investor]

"I believe if the 1099 amount is less than $600 you do not have to report as income but if it is $600 or greater you do."

The $600 threshold relates to whether or not a 1099 is required. The amount is taxable whether or not a 1099 is required.

[commentator]

Feb 1, 2011 17:20:24 GMT -5 Opti said:

I believe if the 1099 amount is less than $600 you do not have to report as income but if it is $600 or greater you do. Just one of the many ways the IRS brings in money.

That is absolutely wrong. ALL taxable income must be reported no matter how small the amount and no matter whether a 1099 was received or not.

[mwcpa]

optimist... check out the following

"§ 61 Gross income defined (a) General definition. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived"

The law does not say if the collecting is under 600.00 it is not taxed... it says, all income is taxable unless specifically excluded....reporting to the IRS by a payer is not the same as reporting to the IRS for the recipient.

Sanity.... the section noted above continues to state

"including (but not limited to) the following items:.... (12) Income from discharge of indebtedness;"

Also, see § 108 Income from discharge of indebtedness.

as Nancy noted, there are some rules that exclude debt discharge from being taxable (there are costs though.... you should see a local qualified tax professional about this)

[sanityjones]

Thanks for the input. I have never had this experience before, and the strange thing is it is only one creditor which has done this. It was a couple of personal debts which I intentionally defaulted on due to creditor snottiness. Everyone else got paid in full.

[mwcpa]

sanity, think of it this way... assuming a 30% effective tax rate....
You borrowed 1,000, paid back zero to the credit card company and now have to pay tax of 300.... you are still ahead of the game by 700 and you have the 1,000 of stuff you bought....I would gladly pay 300 to get something I wanted or needed that was worth 1,000.

[nancy65]

Jan 31, 2011 21:34:00 GMT -5 @sanityjones said:

I recently settled a debt which had gone to collections. I ended up paying about 60% of the original debt. The other day I received in the mail a 1099 for the difference between the original debt and the settlement of the debt (40%). Is this a common practice?

After your clarification of the type of debt--
Yes, this is common practice, and you do have taxable income in that amount. It goes on line 21 of your 1040.

[Opti]

I sit corrected everyone. Sorry.

[ihearyou2]

Or think of it this way, an expense to one party is income to the other and hence taxable.

1099s are simply the way for the government to check up on people's reporting and the 600 is a random number that the government is willing to spend the time sifting through. For dollars less then that they don't want the reporting but 1 dollar of income is supposed to be reported by the taxpayer regardless.