If I settled a bill for less than the full amount, do I owe the IRS taxes on the amount I didn't have to pay?

Question

Example, if I owed a company $500, but settled for $300, do I need to pay taxes on $200?

Answer 1

It depends upon how the company treats it. If it is a discount, then you don't pay tax. If it is debt cancellation, then it is treated as income.

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 Form 1040, line 21 (Other Income). If it is a business debt, report the amount on Schedule C or Schedule C-EZ (Form 1040) (or on Schedule F, Profit or Loss From Farming (Form 1040), if the debt is farm debt and you are a farmer).

http://taxipay.blogspot.com/2008/04/list...

Answer 2

It's reported to you on a Form 1099-C.  It's called cancellation of debt and is recorded as income on line 21 of Form 1040.

Not all companies send these forms out.  If they send you one, they've also sent one to the IRS.

Answer 3

I should think not. It has been a while since I had an active insurance and securities license so I will not say definitively, but I am thinking not. I will keep you in mind, however, and see if an answer hits me before it is resolved. One thing that may affect an answer is whether the debt was a loan or a purchase.

Answer 4

Any debt that is forgiven is considered taxable income to you because you received value from the forgiven debt (similar to barter income).

You may be able to exclude all or part of the forgiven debt if you were bankrupt or insolvent.

See the bankruptcy tax guide

Answer 5

Yes.  Just like if a mortgage is forgiven in bankruptcy oddly enough.