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 0.31%
$10K MMA 0.29%
6 month CD 0.36%
1 yr CD 0.60%
5 yr CD 1.45%

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 fixed4.22%4.27%
15 yr fixed3.19%3.24%
5/1 ARM3.30%3.33%
30 yr refi4.23%4.29%
15 yr refi3.21%3.27%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 17,730.11 -27.80 -0.16%
Nasdaq 5,009.21 -3.91 -0.08%
S&P 500 2,076.78 -0.64 -0.03%
Treasuries 2.39 -0.02 -1.03%
Data as of 8:14pm ET
Company Price Change % Change
Bank of America Corp... 17.03 0.00 0.00%
Apple Inc 126.44 0.00 0.00%
Intel Corp 30.56 0.00 0.00%
Micron Technology In... 19.07 0.00 0.00%
General Electric Co 26.78 0.00 0.00%
Data as of Jul 2

Sections

Greece votes Sunday in a crisis referendum that will determine the country's future in the eurozone. The result is too close to call. More

Entrepreneur Guillaume Gauthereau is on a mission to build a 50 to a 100 acre sanctuary in New York to provide refuge to honey bees. More

The most expensive schools in the nation are charging close to $50,000 a year in tuition and fees alone. More