- The Mortgage Foreclosure Forgiveness Act is effective from the calendar years 2007 through 2012 for debt forgiveness related to mortgage restructuring or mortgage foreclosures. In other tax years, the amount of the debt forgiven by the mortgage lender would be counted as income for the taxpayer. The Mortgage Foreclosure Forgiveness Act allows taxpayers to exclude up to $2 million of income for the specific time period. In order to qualify for the tax break offered by the Act, the forgiven debt must be directly related to the taxpayer’s financial situation or to the reduced market value of the home.
- Creditors may write off or "charge-off" unsecured credit card and other debt if consumers stop paying the bill. The charged-off account can result in more than a bad credit score; it can also impact a taxpayer’s bottom line when filing taxes. A charged-off account does not automatically negate the debt liability; charging off a delinquent account is an internal accounting method that allows the creditor to redistribute the account on the company balance sheet. If the creditor reports the cancelled debt on a 1099-C, the consumer no longer owes the debt, but must report the debt as income.
- Taxpayers whose mortgage or unsecured debts are forgiven during the tax year may receive a 1099-C. Creditors typically send account holders a 1099-C when the forgiven debt, including interest and fees, exceeds $600. Creditors also send a copy of the 1099-C to the Internal Revenue Service. When filing taxes, taxpayers must report the amount listed in box two of Form 1099-C as income for the tax year.
- Mortgage lenders who forgive, or cancel, mortgage debt related to foreclosures or restructuring must send a 1099-C to the taxpayer. When filing taxes, the taxpayer must include a completed IRS Form 982 to claim the income exemption for the mortgage forgiveness amount.
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