IRS

Federal Estate Tax

The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your “Gross Estate.” The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.

Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your “Taxable Estate.” These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.

After the net amount is computed, the value of lifetime taxable gifts (beginning with gifts made in 1977) is added to this number and the tax is computed. The tax is then reduced by the available unified credit. Presently, the amount of this credit reduces the computed tax so that only total taxable estates and lifetime gifts that exceed $1,000,000 will actually have to pay tax. In its current form, the estate tax only affects the wealthiest 2 percent of all Americans.

Most relatively simple estates (cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections, or jointly held property) do not require the filing of an estate tax return. A filing is required for estates with combined gross assets and prior taxable gifts exceeding $1,500,000 in 2004 – 2005; $2,000,000 in 2006 – 2008; $3,500,000 for decedents dying in 2009; and $5,000,000 or more for decedent’s dying in 2010 or later (note: there are special rules for decedents dying in 2010.)

Exerpt from IRS article at: http://www.irs.gov/businesses/small/article/0,,id=164871,00.html

IRS Form 1099-C: Discharged Debt is NOT Income

If you settle a debt for a certain amount of money, the amount you don’t have to pay is “forgiven.”  Using a really simple example, if you have a $10,000 debt, and you settle it for $5,000, the creditor has forgiven the remaining $5,000.

Creditors are known to file IRS Form 1099-C on that forgiven debt.  As I’ve mentioned here when discussing debt settlement, that forgiven amount can be considered income.  Tax liability on that amount is something to be considered in determining the affordability of a debt settlement.

If debts are discharged in bankruptcy, is that considered income?  No.

But if that’s the case, why am I hearing from reliable sources that debtors all over the country are receiving IRS Form 1099-Cs from former creditors?  What’s going on?  And what can YOU do about it?

It’s wise that you not ignore it.  Talk to your tax professional about filing Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness), at least for the amount reported in the 1099-C.  I have seen that it can take up to a few years for the IRS to determine that you under reported your income because you did not include income from a 1099-C.  This form will report the essential facts to the IRS which will show that you are not responsible for the taxes on this “income.”

If you filed bankruptcy and received a Form 1099-C from a creditor, speak to your bankruptcy attorney.

While the creditor is allowed to file a 1099-C, they are required to make sure it is accurate, including indicating on the form that the debt was discharged in bankruptcy (see Box 6 of Form 1099-C, and IRS instructions).  Even so, debtors will find it unsettling – even more so if they receive inquiry from the IRS next year, or the year after requesting an explanation as to what might be perceived as under-reported income.

Since it’s tax time, it’s important that I at least sound the alarm that something may not be right with creditors issuing IRS form 1099-Cs.  If you’re in chapter 13 or if you have received a discharge, make sure you’re not getting a 1099-C that you do not deserve, and if you do be proactive to avoid problems down the road.