Do You Owe Taxes on Debt Forgiveness? What Florida Residents Need to Know

If you have recently had debt forgiven, you are likely feeling relieved. Unfortunately, that feeling could be short-lived. Many Florida residents do not realize that, in some cases where a creditor forgives a debt, the Internal Revenue Service considers it as income. This means that the debt forgiveness you were so happy about could end up triggering a hefty tax bill. Florida tax-IRS attorney Ronald Cutler explains what you need to know about canceled debt and your potential tax obligations.

When Is Forgiven Debt Taxable In Florida?

Debt forgiveness can play a significant role in helping you and your loved ones avoid financial problems, but be aware that it still generally comes at a cost.

Current Internal Revenue Service (IRS) guidelines require that forgiven debts in Florida (and other states) be treated as taxable income. This applies to:

• Personal loan forgiveness;
• Credit card debt settlements;
• Mortgage loan modifications and foreclosures;
• Student loan forgiveness, in some cases.

To better illustrate how taxes on debt forgiveness works, consider this example: You owe $10,000 in credit card debt and settle for $4,000. While that provides considerable relief, the $6,000 forgiven is typically considered taxable income.

Lenders or credit card companies will send you a Form 1099-C. This reports the amount of debt forgiven not only to you but also to the IRS. Failing to claim this amount as income on your tax return could leave you paying even greater amounts, once the IRS tacks on penalties or fines.

Exceptions to Debt Forgiveness Taxes In Florida

Debt forgiveness can provide the breathing room you need to make a fresh start financially, but it can come at a cost. Fortunately, there are certain circumstances in which you may not need to claim forgiven debts as income or pay taxes on them:

• For insolvency exceptions: You may not be required to claim the forgiven amount as income if your debts exceed your assets.
• For mortgage debt forgiveness: If the forgiven debt is related to your primary residence, such as in certain short sales, foreclosures, or loan modifications, you may not need to claim it as income.
• For student loan forgiveness: Some government and nonprofit student loan forgiveness programs are tax-free. For example, Public Service Loan Forgiveness (PSLF) does not result in taxable income, but private student loan forgiveness may still be taxable.

Exceptions for forgiven debts are nuanced. A detailed review is needed to determine whether they apply to your specific situation.

For Help Navigating Debt Forgiveness Taxes, Contact Our Experienced Florida Tax Attorney

If you’ve had debt forgiven or received a 1099-C form, it’s important to understand your tax responsibilities to avoid surprises and penalties.

Florida tax attorney Ronald Cutler, a CPA and former FBI special agent in tax cases, has over 50 years of experience assisting individuals with tax planning and resolving IRS issues. We can review your case, help you assess your eligibility for exclusions, and look for other ways to reduce tax debts. To schedule a consultation, contact our office today.

Sources:

irs.gov/publications/p4681#:~:text=Generally%2C%20if%20you%20owe%20a,pay%20tax%20on%20this%20income.

irs.gov/forms-pubs/about-form-1099-c