The power of forgiveness. Forgive your trespassers. Forgive your spouse. Forgive your children. Forgive the jerk on the Pkwy that cut you off. We've all heard of these things. But what happens when someone forgives your debt? What are the laws that affect debt forgiveness? What are the tax implications of debt forgiveness?Okay so let's talk about three different debt forgiveness scenarios.
- Credit card debt forgiveness - let's say things are going fine and you are cruising along and you have a little bit of credit card debt about $1600 and all of a sudden you lose your job. So you're thinking the smart thing to do might be to call my credit card company and ask them to forgive some of my credit card debt. And the nice fellows that they are they agree and forgive $600 of credit card debt. Well two weeks later you get a notice from the card company in the mail. It's an IRS form 1099-C "cancellation of debt ". Believe it or not the Internal Revenue Code considers that cancellation of credit card debt greater than $600 to be income. And so you'd have to pay taxes on it. Now that is irony.
- Loan modification or short sale- let's say you live in Arizona and the real estate market has dropped and your home value has dropped significantly. So you decide to ask for a loan modification in which the lender forgives a portion of your debt on the mortgage. Well, be careful that you understand all the tax ramifications of this type of situation. In some situations that forgiveness of debt can be considered as income and you could be taxed on it. However if that forgiven debt is for your primary residence and it is only acquisition debt. You will escape the grips of the tax man. If that doesn't work try using the picture above.
- Offspring contribution debt forgiveness- let's say it's Friday morning and you're rushing out of the house. You really want cup of coffee but you don't have time to make some. So you have to stop at the store and buy some but you realize you don't have any cash. Just then your 3 1/2-year-old son looks up at you with the cutest Bambi eyes and says "here Dad you can have my dollar but you have give me a puppy". Well in this situation there is actually no tax implication but you'd better give that little boy something, because that's a sign that he truly loves you. Okay so I threw that last one in there just to see if you were still paying attention.
I think there's just something unfair about these situations. So use the comment box below and tell me how you feel about this issue.
Postscript: Don't forget to ask the puppy to dance.
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