My credit card company wrote off part of my bill when I was laid off and couldn't make payments. I got a 1099-C for the amount they wrote off and I'm just wondering if I have to pay taxes on that amount now?
I should mention that yes, forgiven debt is taxable generally speaking, however there is an exception for insolvency. IRS form 982 will give you guidance on this issue. In this economy there are many situations in which immediately before the debt was forgiven, the taxpayers liabilities (debts) are greater than the value of all of their assets. This may give you a way out.
Unfortunately after you deal with the creditors the tax man shows up. The IRS does consider forgiven debt taxable income. And every lender who agrees to accept more than $600 less than you originally owed them are required to report it to the IRS by filing the 1099C.
This is the painful downside of getting a debt cleared by a creditor. Yes, the cancelled debt is considered income Yes, you are responsible for paying taxes on it. This is what is called "phantom income" because you received this income on paper but don't actually receive the cash. When you file your taxes next year, you need to include the 1099-C and the amount will be added to total income. Depending on your total tax situation, you may end up with a lower than "normal" tax refund or owe more as a result after netting the impact of your other tax deductions, exemptions and credits.
It is a taxable event however, it is possible you may not owe any income taxes on this even though you received a 1099. The 1099 is reportable as income on your tax return, however, if you are considered to be insolvent by the IRS, the 1099 is not included as taxable income. I would suggest to consult a good tax advisor to review whether you would be considered insolvent.
I have seen situations where a who owes a lot of money gets a credit card written off for few thousands and because of the debt load( mostly student loans) they are considered insolvent and the 1099 income is not included as phantom income.