Debt forgiveness is an excellent thing for many people, as it means less than the complete of a debt has been paid though the debt has been satisfied. However, it’s considered taxable income and the lapse of a debt forgiveness tax break for foreclosures or short sales of houses is set to bite some taxpayers.

Government taking debt forgiveness

Millions of people breathe sighs of relief annually when granted debt forgiveness. Also called debt relief, debt cancellation, it’s where a loans lender of some sort, like a charge card company, mortgage lender or whomever, agrees to forgive a debt if the borrower agrees to pay off a portion, typically on a condensed payment schedule.

Debt forgiveness is really taxable income though because it is known as an increase in someone’s income, according to the Wall Street Journal. People getting debt forgiveness this year will be mad when they find out they have to pay additional taxes.

The lenders will then give form 1099 C to the borrower, so they can report it on their taxes during the year.

Think about your mortgage

Debt forgiveness taxes can be a real kick in the nether regions when connected to home loans. When a home loan lender forecloses on a house and either forgives the debt, reduces the principle or agrees to a short sale, the fair industry value and pardoned debt for the home have to be reported on a 1099 C. However, the tax on it, for some, is exempted for the time being.

Anyone in the Home Affordable Modification Program, or HAMP, could avoid paying taxes on the reduction or modification of their home loan, according to a 2007 law called the Home loan Forgiveness Debt Relief Act. It also helped people who were foreclosed on from dealing with extra taxes.

It does not contain any second-home mortgage loans, though it does contain all primary residences, according to the Wall Street Journal.

Will be a headache next year

When the fiscal cliff negotiations were occurring, it incorporated the program. It will still expire in 2014 unless extended though. Homeowners should take advantage of claiming the forgiven home loan right now if they can to keep away from paying taxes on it. Pardoned homeowners do have three years to pay the taxes, so at least there is there.

Over 1 million 1099 C forms were filed in 2003 with the Internal Revenue Service. In 2013, that is anticipated to be 6.5 million. There is more debt cancelation occurring now more than ever, according to Creditcards.com.

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