An increasing number of Korean-Americans, who have been approved for 1099-C (commonly known as cancellation of debt), remain oblivious to the consequences of such a benefit until they are hit with higher income taxes.
In many cases, the 1099-C applicants are unaware that the amount of the cancelled debt is directly counted as their income when taxes are filed, to Koreatown accountants say.
“I’ve encountered people who were shocked to find out that their taxes have soared after they apply for debt cancellation on their credit cards,” said Martin Park, who works as a public accountant in Los Angeles. “It’s imperative that more people understand that cancelled debt is counted as their income.”
Although unpaid debts on credit cards and other liabilities may be cleared via 1099-C, the cancelled sum must be counted towards one’s income during the tax filing period. Those who are not familiar with this information will surely be shocked to find out how much their annual tax has soared compared to the previous years.
To help financially-pressured taxpayers who have lost their homes to foreclosure from 2007, California’s state government established the Mortgage Forgiveness Debt Relief Act, under which those who have been approved for cancellation of debt may receive tax exemption of up to $1 million.
However, debt cancellation on credit cards and second-mortgage loans are not applicable to the effects of the relief act. Hence, cancelled credit card debts are part of one’s income when the annual taxes are filed.
Accountants advise that even those who have filed for bankruptcy after losing their homes must include the amount of cancelled credit card or second mortgage debts as part of his or her income to the IRS.
All of this means that cancelling debt doesn’t exactly make one immune to financial burden.
By Sung Cheol Jin