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.

CDs & Money Market
MMA 0.37%
$10K MMA 0.33%
6 month CD 0.35%
1 yr CD 0.67%
5 yr CD 1.38%

Find personalized rates:
 

Rates provided by Bankrate.com.

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

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.32%4.27%
15 yr fixed3.29%3.27%
5/1 ARM3.34%3.47%
30 yr refi4.29%4.24%
15 yr refi3.26%3.25%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 16,982.59 22.02 0.13%
Nasdaq 4,444.91 -4.65 -0.10%
S&P 500 1,978.91 0.57 0.03%
Treasuries 2.49 0.02 0.89%
Data as of 5:47pm ET
Company Price Change % Change
Apple Inc 99.02 1.99 2.05%
Facebook Inc 74.92 -0.06 -0.08%
Bank of America Corp... 15.50 -0.09 -0.58%
Dollar Tree Inc 54.87 -0.08 -0.15%
Family Dollar Stores... 75.74 15.08 24.86%
Data as of 4:03pm ET

Sections

Herbalife shares tumble after the maker of nutritional supplements reports earnings that fall short of analysts' estimates. More

New annual report from U.S. government shows the long-term prognosis for Medicare has improved thanks to slower health spending, while the outlook for Social Security remains unchanged. More

Online dating site OkCupid found its users were more likely to have conversations when it told them they were more compatible than in reality. More

Actor-founded This Bar Saves Lives had Hollywood connections, but learned Start-Up 101 the hard way. More

Ali Ewoldt has performed in Broadway musicals and TV shows. Her days consist of auditions, rehearsals, and being on stage in front of hundreds of people at a time. Here are journal entries from a day in her life. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.