With tax season just around the corner, now’s a good time for consumers to familiarize themselves on the various tax laws – especially if they’re filing their own taxes. Recently, a tax advocacy group says more people qualify for a tax exemption on forgiven credit card debt and often don’t even realize it.
The biggest reason consumers don’t tax advantage of this opportunity is because they aren’t even aware that it exists. In fact, a spokesperson for the American Institute of Certified Public Accountants says too many consumers find the various tax laws and changes “complicated and daunting”, so they take a Tylenol in preparation of the headache that’s sure to arrive and then take the path of least resistance when they’re doing their taxes.
The good news, however, is consumers can go as far back as 2008 and file an amendment. This could mean an impressive tax refund. Experts say, however, recruiting a professional to help go through your credit card history to see how much, if any, you qualify for is your best bet.
What You’re Looking For
If you were sent a 1099-C, it means that somewhere, credit card debt was forgiven or canceled. It was reported to the IRS as income. If your total liabilities were more than your assets as the time the credit card balance was settled, you are considered insolvent. As analysts say, insolvency is one of the key avenues for avoiding paying taxes on canceled credit card debt. The problem is that many lower income families are limited to their access to changing laws and what the insolvency means. The miss out on the opportunity to take advantage of the exemption. Yet, studies show low-income families most likely to meet the insolvency criteria don’t take the exemption.
Taxpayers may not understand that they are not required to include canceled debt in income if they were insolvent when the debt was canceled,
says Nina Olson, who serves as the head of a citizen advocacy group and division of the IRS.
A 2010 report by this advocacy group highlighted more than a few glitches associated with canceled credit card debt. Creditors often report the wrong figures to the IRS (on a side note – there is growing concern regarding creditors whose numbers are substantially off). And, of course, there’s the confusion of taxpayers who don’t understand the financial lingo and who aren’t even aware of the credit card debt law.
Sky High Numbers
The IRS says than in 2003, there were less than 1 million taxpayers who would have qualified for this tax break. In 2010, that number hovered near 4 million. 2011 promises to deliver numbers closer to 6 million.
Also confusing is the 1099-C that taxpayers receive. This is the amount written off credit card debt written off by the creditors and was reported as income. This is likely where taxpayers get confused. If you carried a credit card balance of $1,000 and could no longer make the monthly payments but were able to come to a settlement with the creditor of $500, the remaining $500 is what would appear on the 1099-C as income.
It’s the IRS – sure there are going to be exceptions. If you filed bankruptcy and included your credit card debt in the filing, the unpaid balance is exempt. Also, if you can prove your debt was higher than your assets at the time the credit card balance was canceled, you’re also exempt.
Your Next Move
Wondering how to get that tax exemption? Fill out an IRS form 982 and then include it as well as the 1099-C to your income tax filing. If you’re looking for a worksheet to help you make your determination, you’ll find it in IRS publication 4681. It’s an easy to follow format and will quickly help you ascertain your specific situation.
If you’re still unsure of whether the numbers are accurate or not even sure if you qualify for the exemption, it’s a wise move to consult with a professional tax consultant. It can be complicated and can also quickly become overwhelming if you’re unfamiliar with the accounting aspects of filing your taxes. Still, the time commitment might be a wise investment and a great benefit to taxpayers – if they take advantage of it.