By now you’ve actually most likely begun receiving your tax-related types.
Most of you’ll receive kind W2, which is sent out by your employer and memorializes your earnings earned for tax year 2013.
Some of you, like me, will receive one (or numerous) 1099s. A 1099 is sent to people who do agreement work as a non-employee.
[Read: Tax Tips for 1099ers]
And some of you’ll unfortunately get form 1099-C.
What’s a 1099-C?
A 1099-C is a tax form sent out by your charge card issuer. The 1099-C represents debts that have actually been forgiven by your lenders, which is why the type is also called a “cancelation of financial obligation.”
This kind is sent when you settle financial obligations with your creditors, or they have proactively chosen to no longer attempt to collect a financial obligation.
Creditors are needed to report any unsettled primary balance to the IRS when they no longer try to gather the debt.
So, if you’d a balance of $5,000 canceled by a creditor, they’ll report that balance to the IRS for tax year 2013.
The 1099-C is frequently a surprise to consumers because they thought after they settled a debt with their credit card issuers that their difficulties were over.
According to the IRS, “If a taxpayer received kind 1099-C, all canceled financial obligation will be included on Type 1040, line 21, Other Income.”
And while I am not a tax professional, it sure seem like you’ll be paying taxes on the canceled quantity because it’s thought about earnings.
How this impacts your credit reports.
With respect to credit reporting, debts that have been canceled or settled are NOT paid in full. They are settled in full, and there’s a big distinction between the 2 terms.
Settlements do show up on credit records and they’re thought about derogatory because the loan or obligation went into default.
That sort of negative product can stay on a credit report for as much as seven years.
[Review: 7 Record-Keeping Tips That Will Make Tax Time a Breeze]
An account that’s been settled, or “canceled”, will have to be reported as having a no balance. There’s nothing due on the account in spite of that truth that it hadn’t been ever settled.
As such, reporting that there’s a balance due (or unpaid) would recommend that the creditor still has the right to gather on the financial obligation, which they do not.
And while having actually the account shown as having “zero balance due”, it doesn’t negate the fact that it can hurt your credit scores.
The bottom line.
Still, in the grand scheme of things, settling a financial obligation might be a wise move.
Owing $10,000 on a charge card and paying just $2,500 to settle it absolutely works in your favor, even with a tax obligation on the forgiven $7,500.
[Read: Should You Leave Your Taxes?]
You’ll net out ahead in spite of the reality that getting a 1099-C is likely going to be a surprise.
If you worked with a debt settlement business to help with your settlement offers, then you paid them a large piece of change to do something that you can have done on your own for free.
And, it’s very likely they did not discuss the reality you ‘d be receiving a 1099-C which settling a financial obligation would develop a taxable event, like selling stock or offering a bond.