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Here's the tax bill for forgiven debt

By Jen Haley, producer

NEW YORK (CNN) -- If you've had any debt forgiven last year and settled a debt for less than the full amount, you could be in for an unpleasant surprise at tax time.

If you've reached a settlement with your credit card issuer, had some of your student loan debt or auto loan debt forgiven, that amount is considered income by the IRS. You will have to pay tax on it if you're not declaring bankruptcy or if your personal liabilities outweigh your assets.

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Let's look at what this means for your wallet. If you had $600 of debt forgiven on a credit card balance and you're in a 15% tax bracket, your tax obligation would increase by $90.

Your creditors and debt collectors will file paperwork with the IRS if they have reduced your balance by $600 or more. But it's up to you to include this on your personal income tax return. You should report any amount you're forgiven, even if it's $10 dollars says John Roth, a tax expert with CCH.

Here's the good news for homeowners.

You don't have to report debt forgiveness for a home loan as long as it was less than $2 million on a principal residence. This law will be in effect until 2012. Keep in mind, this only applies to a principal residence. So, if you had a loan modification or a short sale on a vacation home, you will have to report the forgiven debt.

If you get a 1099-C, a cancellation of debt form, from your creditor -- this is the form that your creditor filed that proves your debt was settled -- make sure you include it with your taxes.

Ben Woolsey of Creditcards.com says beware of inconsistencies: If there is a dispute about the amount reported on the form, contact the creditor or debt collector immediately to resolve the matter. Then ask for a corrected 1099-C form to include in your tax return.

Talkback: Did you have any debt forgiven last year? (See comments) To top of page

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