Hello all. As I am getting my act together to file my taxes for TY2002 I realize that I have some FDCPA / FCRA settlement income. Everything I have found so far on "that there in-tar-net" tells me that it is taxable at the same rates as regular income. I was hoping someone here has the definitive answer and also hoping that others here have the same issue to deal with. I figure that a backhanded way for a CA to get back at someone who filed against them would be to report the settlement to the IRS with the idea that the IRS would discover that the payee didn't report it and would thus provoke the rath of our good friends from the IRS. Thanks!
Are you talking about the "pay my $1000 for violating my rights" or taxes due for settling a debt for less than full value? The "pay me $1000" is generally not taxable - it is reimbursement for damages suffered. Settling a debt for less than full value is taxable as miscellaneous income.
Thanks for the reply. I am talking about settlement in consideration of dismissal of a lawsuit or not filing one to begin with. You mention that they are generally not taxable; do you have an example of when they would be taxable? (ie If they are awarded punitive damages?) I sucessfully negotiated a (legal) settlement with a CA early last year and received a check and I want to be sure that the CA or their attorney do not try to cause me problems with the IRS in regards to this. I don't plan to file my taxes until the first week of February, just to make sure a stray 1099 doesn't appear but I am starting to get my act together so I can do it quickly. I don't like to loan the government my money any longer than I have to. Thanks again.
I was told by my accountant that it is taxable income. The only type of settlement or court award that isn't taxable is personal injury and accident awards or settlements. That money is tax free. If the person you sued didn't ask you to fill out a W9 form then most likely the IRS won't know about the settlement unless they do an audit on you. This of course is not legal to not report it though. Tac
Very timely topic.... here's my scenario and if anyone can provide help it would be greatly appreciated. Just yesterday my wife received a letter from the IRS saying that she owed taxes on a charge-off from 2000. This was an FCNB account that had been charged off right before we met. In the early process of cleaning her credit last year I mistakenly decided that we should pay off the $1400 that had been charged off thinking that a paid charge-off would be better than an unpaid charge-off from a credit score standpoint (and, admittedly a moral standpoint too). Anyway, we went ahead and paid the full $1400 amount to the CA that the acct. had been turned over to. So, it has been paid in full, but now we get a letter from the IRS saying that she owes taxes on the original charge-off. Not sure who we should contact about this and what kind of paperwork will be necessary to clear it all up. Any advice would be greatly appreciated. TIA! Kirk
So, it has been paid in full, but now we get a letter from the IRS saying that she owes taxes on the original charge-off. c5kirk | ====================== If you paid it in full there is no charge off. LB 59
Exactly!! You would only owe taxes if FCNB reported that you settled for less then the full amount owed. I would contact the IRS and alert them to this and find out how much FCNB stated you paid them. Tac
Settling a debt for less than full value is taxable as miscellaneous income. cannoda =========================== It is not an income gain, it is a loss of income.
If it was paid in full respond to the IRS explaining that fact along with cancelled check or other proof. Good luck.
The rules regarding personal injury settlements recently changed to where it is now taxable. I am pretty sure all settlements from lawsuits are now considered income and taxable.
Those bastards at Nextcard sent me a 1099c for $860. the thing is they continued to assess late fees and overlimit fees for 3 months after I settled the account. So in reality the amount I owe them would be less than $600. Anyone got any ideas on how to handle this?
<< the thing is they continued to assess late fees and overlimit fees for 3 months after I settled the account dixidriftr ========================== >>Any thing they added after the account was closed is not taxable.
My SIL incurred tens of thousands of $s in medical bills. So if she sues the drunk driver and is awarded $5000 she owes Uncle Same income tax .I think not.
The IRS, of course, considers the difference between what you owed and what you paid as income. Pnwman =================== So you buy a 15000 car and negoiate a 10000 price and now you owe IRS tax on the 5000 discount ! LB 59
No. What you agree to pay is the transaction amount. The seller's original price is simply an offer to get negotiations started. When you complete a credit transaction, you are OBLIGATED to pay the agree price. If you are OBLIGATED to pay someone something and you are released from that obligation (as it a settlement for less than full) the difference between the obligated amount and what you actually paid is taxable income. The exception to this is where the release of the obligation is intended as a gift. A settlement to a debt between two arms-length parties cannot be considered a gift, absent some unusual motivation of the giftor. I was wrong where I previously stated that all damage settlements were non-taxable. There was a recent change in the law that made damage settlements taxable unless they are related to medical or personal injury issues.
When ever you settle an account for less that the amount due you should DEMAND a 1099 for the difference. This way there is no debt owed and you have proof via your cacelled check and the 1099 As when you borrow 15000 and pay 5000 the balance is 10,000. Youi don't pay tax on the 15K as it was borrowed. however once the debt balance is settled for say $5. Now things change you now borrowed $10 K and " earned " $5K which is now taxable as income . I would guess the logic is corps could " lend the fatcats " bunches of money and forgive the debt and then it would be taxfree. This where the enron scandal will cripple a lot of the big shots when or if the smoke finally clears
You can make this interesting by putting the IRS in the middle of your dispute. Before you do what I'm about to suggest, make absolutely certain that you do not have an LEGAL obligation to pay the balance they used in calculating the 1099c amount decide whether the amount of taxes saved is worth it. I would also not try this if you were more than a little aggressive in preparing your tax return. I would do the following if I were sure that the balance they based the 1099c amount on was LEGALLY bogus: Write a letter contesting the amount of the 1099c to Nextcard send it CRRR When preparing your tax return, create a schedule listing all of your miscellaneous income, including the full amount of the erroneous 1099c On the same schedule, deduct the erroneous amount with some language saying error is 1099, see attached statement Prepare a statement saying that the balance used by the creditor in calculating the amount of income was in error because - list reasons. Your reasons should lead a reasonable person to believe that you did not have a legal obligation to pay them. Reference the letter you sent Nextcard in you statement and include a copy of the letter and green card with your return. If they did not respond to your letter, say so in your statement. Next to the amount on the line you report miscellaneous income, type or write "See attached schedule and supporting statement" Fair warning - the IRS computer might send you a notice sometime in the future saying that you failed to report the amount on the 1099 because their computer is lousy at reading explanations and attachments. However, it IS on your return, and you would simply point it out to them at that time. This is an amount that they would likely not screw with you over, esspecially since it was specifically addressed in your return. As a general rule, the best way to handle any 1099 that reports income that isn't yours or belongs to someone else is to get a corrected 1099 from the issuer. Where that can't happen or doesn't happen, report the entire amount of the 1099 on your return so that the computer sees the 1099 amount. Then deduct the appropriate amount on a separate line with some kind of explanation. If the income belongs to someone else, you would list the name and SS# of the person it belongs to. But the important thing is to list the 1099 on your return at the reported amount.
I would submit the 1099 as is and if you can get it amended later then just amend the tax return Now considering the CA give you a 1099 I wonder whethr they claim that as an expense . What a scam that would be buy 10K debt for $100 settle it for $1k take deduction for the 9 K so 1000 minus the 100 cost net profit 900 with a 9 K deduction Anyone got any debts for sale \(grin) Enquiring minds want to know You may wish to read this from the IRS first.. Generally, if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income. You have no income from the canceled debt if it is intended as a gift to you. A debt includes any indebtedness for which you are liable or which attaches to property you hold. If the debt is a nonbusiness debt, report the canceled amount on line 21 of Form 1040. If it is a business debt, report the amount on Schedule C or C-EZ (Form 1040) (or on Schedule F, Profit or Loss From Farming (Form 1040), if you are a farmer). http://www.irs.gov/formspubs/page/0,,id=10970,00.html
