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Just Received a 1099-C? Don’t Freak Out!

February 2, 2012 By

Over the past week we’ve been flooded with panicked questions from taxpayers who are freaking out after have receiving 1099-C or 1099-A forms for debts that were forgiven, never paid back or wiped out in bankruptcy. The main theme of these questions is “Do I have to pay taxes on the amount on the 1099-C (or 1099-A)?”—usually followed by “HELP!!?”

My first piece of advice: Take a deep breath! You may not have to pay taxes on the amount of the income listed on the 1099-C or 1099-A.

At the same time, doing nothing is not an option. If you got a 1099-C or 1099-A, so did the IRS. That means you must explain to the IRS why that amount should not be included in your income. If you don’t, the IRS will assume that money counts toward your income and you may either get a smaller tax refund than you expected or, worse: A bill from the IRS.

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How can you avoid including that amount in your taxable income? By showing that you qualify for an exclusion or exception. I described these in my previous article, How to Avoid Taxes on Cancelled Debt, and more details are also available on the IRS website.  You may be able to simply fill out Form 982, claim an exclusion or exception, and be done with it. Sometimes it’s more complicated than that, though, and you need to work with a tax professional.

[Infographic: What to Do If You Get a 1099-C]

Here are a couple of examples of questions we received recently about 1099-Cs:

1099-C for Debt Wiped Out in Bankruptcy

I included my automobile with my bankruptcy in 2010, it was a Chapter 7. However I received a 1099 for the car that I included in the bankruptcy. What do I do now? Must I pay the taxes on this large amount even though it was included in my bankruptcy? Please help.

Debt that was discharged in bankruptcy can be excluded from your taxable income. Take a look at Form 982. At the top of the form you’ll see box 1 a. Discharge of indebtedness in a title 11 case. (Don’t be confused by the reference to “Title 11″—that’s just the part of U.S. Code that covers bankruptcy).  You can check that box. Then on Line 2, you’ll put the amount that was discharged in your bankruptcy for that debt and any others that were reported on a 1099-C. That amount will be excluded from your income. It should be simple enough.

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Student Loans Cancellation

My student loans were discharged. I am on Social Security. Do I have to file the 1099-C I received for $62,000? My student loans were discharged due to total disability and I don’t file taxes because Social Security is non-taxable….HELP!!!!

First, keep in mind you don’t file the 1099-C; the lender does. A copy has already been sent to the IRS. So you must now demonstrate to them that part or all of that “income” is not taxable. How do you do that? By figuring out whether you qualify for an exclusion or an exception, and if you do, filing form 982.

You mention that your student loans were “discharged.” Do you mean discharged in bankruptcy? Or do you mean they were cancelled due to your total disability? If they were discharged in bankruptcy, then read the previous question and answer for more information on how to claim the exclusion for bankruptcy debts.

[Related Article: How to Avoid Taxes on Cancelled Debt]

If they were cancelled, however, then it’s not quite as simple. According to the IRS, “Generally, if you are responsible for making loan payments, and the loan is cancelled (forgiven), you must include the amount that was forgiven in your gross income for tax purposes.” There is an exception for student loans that were used to attend a qualified educational institution and were cancelled because you worked for a certain period of time in certain professions. (An example would be a doctor who works in a qualified low-income area.) I didn’t find any reference to an exception or exclusion for student loan debt that was cancelled due to disability, though.

However, you may qualify to have part or all of the $62,000 excluded from your income if you are considered by the IRS to be insolvent. You’ll see a simplified example of how that works on our Infographic: What to Do If You Get a 1099-C. Review Form 982 and the instructions to see if you feel comfortable filling it out yourself. If not, your disability may qualify you for free or low-cost tax help through the Volunteer Income Tax Assistance Program.

Please keep in mind that I am a credit expert, not a tax expert, and the information in this post is strictly for educational purposes. See a tax professional or contact the IRS for help with your individual situation!

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Image: nate steiner, via Flickr.com

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Are Credit Card Rewards Taxable?

January 31, 2012 By

Last week, some consumers began receiving IRS forms sent by their credit card lender, prompting a lot of concern about what benefits received as part of owning a rewards card were considered taxable. Now, the IRS has clarified its position.

Citibank’s decision to mail tax forms to some of its rewards cards customers certainly caused a stir last week, but now the IRS has come forward to make clear just what is and is not considered taxable under current codes. Essentially, consumers who received rewards points, miles or cash back just for opening a rewards account will have to pay taxes on the value of those benefits because it is considered “miscellaneous income.” However, rewards points accrued in the course of normal credit card spending are not considered taxable because the IRS views them as rebates that help defray the cost of a purchase, rather than additional income.

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[Article: Paying Taxes With a Credit Card: Yea or Nay?]

“A common analogy is buying a $500 television at a retail store and receiving a $50 manufacturer’s rebate,” IRS spokeswoman Michelle Eldridge told the Los Angeles Times. “It’s not income, just a deemed reduction of the cost of the television.”

U.S. Sen. Sherrod Brown, an Ohio Democrat, who chairs the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, was unhappy about Citi’s decision to send the tax materials and contacted the bank asking it to stop treating these rewards as taxable income. However, Citi says it was just following tax law, because while smaller items with lesser values often go unreported, those that are more valuable are often reported by banks as a business expense, necessitating that consumers report them as well.

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As for what the miles or points are valued at, Citi says that each one is worth about 2.5 cents apiece. So if a consumer received 10,000 for signing up, the value of that offer was $250. Meanwhile, Citi also claims that the tax implications of these offers was made clear in the materials given to borrowers when they were offered the accounts, though it was in fine print.

Many banks are now sending out offers for new rewards cards that grant consumers hundreds of dollars worth of miles just for signing up, then double that amount if they meet certain spending thresholds within the first few months the account is open.

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Paying Taxes With a Credit Card: Yea or Nay?

January 18, 2012 By

Taxes aren’t due this year until April 17 but already readers are asking: Should I pay my taxes with my credit card? Or better yet, a rewards credit card?

I’m all for maximizing cash back, miles, or points, but if you pay your taxes with a credit card, you have to pay a convenience fee, which varies by service provider. For example, if you e-file through Turbo Tax, you’ll pay a 2.49 percent fee.

[Related articles: More on credit and taxes]

Let’s take a look at the numbers and see if it makes sense:

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Example 1: You owe $1,000 in taxes and you get 1 percent on your rewards card. You’ll have to pay $24.90 for the convenience of using a credit card. You only get $10 in rewards, so this is a no-brainer, right? It doesn’t make sense to use a rewards card. You’d need to get 3 percent in rewards to make a mere profit of $5.10.

Example 2: You owe $4,000 in taxes and you get 1 percent on your rewards card. You’ll have to pay a convenience fee of $99.60. You only get $40 in rewards, so this still doesn’t work. You’d need 3 percent in rewards to make a profit of $20.40.

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As your tax bill goes up, the convenience fee goes up. On most credit cards, paying your taxes would fall under “1 percent on everything else.” So unless you have a truly elite card with high rewards “on everything else,” paying your taxes to get the rewards doesn’t work out in your favor.

Now, you can deduct the convenience fee as a miscellaneous expense on Form 1040, Schedule A. But the deduction is subject to the 2% limit on Form 1040, Schedule A (see Publication 529). This means that your miscellaneous expenses (this category includes job expenses, tax preparation fees, and other expenses, such as safe deposit box fees) have to exceed 2 percent of your adjusted gross income.

If you really have to use a credit card to pay your taxes, consult with a professional tax preparer to make sure you take this deduction if applicable.

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Image: © Terrance Emerson | Dreamstime.com

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It’s Tax Day! Need to File a Last Minute Tax Extension?

April 15, 2010 By
If you haven't filed your taxes for 2009, it's not too late. You can still make the deadline by filing an extension online - but you'll need to do it today, before midnight.

The IRS allows you to apply for an automatic six-month extension to file your taxes by filing the Application for Automatic Extension of Time to File, Form 4868. This extension gives you until Oct. 15th to file your tax return.  There is a catch though-- while an automatic extension gives you a six-month reprieve from filing, it does not give you an extension on the time to pay your taxes if you owe.

So if you haven't done your taxes yet, how are you supposed to know what your estimated taxes are?  There are actually a few free tax estimator utilities available online to help.  H&R Block has a quick and easy one that you can use to help get a quick estimate of what your balance due might be.  Remember, you're just looking for an estimate. It'll also give you an estimated return amount if you're due a refund. 

So now that you have your estimated tax, how do you file the form? It's actually pretty easy! And even though there are websites like FileLater.com that will charge you $17.95 to file the form for you, you can actually do it  yourself --for free.



How to File a Last Minute Tax Extension for Free

Or you can file manually...

  • Manual File - Simply download Form 4868, complete the form, estimate your taxes with one of the free tax estimator utilities, include an estimated payment if you owe and drop it in the mail. You'll need to make sure you visit a post office that's open later to ensure that it's post marked with today's April 15th deadline date.


Hopefully you can breathe a little easier knowing that you have another six-month's. Happy Tax Day!
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Shoeboxed: a Netflix for your Receipts

April 12, 2010 By
Images Tab Cov Img If you've been following my posts for the last few weeks, you know that I've been searching for a way to digitally store all my important paper records. (If you need to catch up, here's my post about discovering that a bunch of paper records had been damaged by rain water.) The first solution I tested was the Fujitsu ScanSnap S1500, a high-speed, sheet-fed scanner that can read both sides of a paper document at once. I ended up loving it. (Read my review of the ScanSnap S1500 here.) I also tried the smaller, slower ScanSnap 1300, which I liked, but not nearly as much as its more powerful sibling.

The second document-storage solution I tried was Shoeboxed, an online service that has been described as a "Netflix for receipts." It works like this: you save your receipts (and other documents), and once you have a collected a stack of them, you stick them in a prepaid envelope and drop them in a mailbox. Shoeboxed will scan the receipts and upload the digitized copies to its server so you can access them anytime you need refer to them. When you visit your page on Shoeboxed, you can see the totals, dates, and store names for each receipt. (This Shoeboxed video shows the basic process).

To test out Shoeboxed, I registered online and a couple of days later I received a couple of large business reply envelopes. I stuffed one with fifty receipts and documents (including several of the wrinkled, water-damaged ones) and sent it in. (When it comes to security, the Shoeboxed site reminds you that your documents, when in transit, are at the mercy of the security practices of your parcel service of choice.)

Two weeks later, Shoeboxed emailed me to let me know they were ready. Two weeks is a long wait. What if you need to refer to a receipt during the processing interval? With the ScanSnap, I have instant access to my receipts, and in two instances that I can recall, I was glad that I did have immediate access. (A day or two after my records showed up in Shoeboxed, I got the paper originals in the mail, along with a new envelope to send in my next batch of documents.)

I went to Shoeboxed to look at my records. The web page that displays receipts is excellent. My receipt data was presented spreadsheet style, with one receipt per row, and there was a little magnifying glass that I could click on to get a pop-up image of the actual receipt. Shoeboxed handled hand-written receipts flawlessly -- a representative from Shoeboxed told me that all the records are reviewed by real people (who, according to the company, undergo background checks and are supervised while they work). I was able to sort my receipts by clicking on the column headers: store name, categories, total or date.

One especially nice feature is automatic categorization -- I was able to assign a categories to different retail stores. That way, whenever Shoeboxed sees a receipt for Staples, it'll categorize it as "office expenses" (or whatever category you want to assign it). Another welcome feature is the ability to export receipt records in a variety of formats, including Excel, Quicken, and recently, Evernote. (I'm a big Evernote user and I'm going to review it here soon). So far, only receipts, not documents, can be exported to Evernote.

Shoeboxed's iPhone app allows you to take photos of receipts. They get scanned and processed just like the documents you mail in. The receipts I submitted to Shoeboxed this way were processed within 48 hours.

Shoeboxed offers a range of service plans ranging from $9.95 a month for the "Lite" plan (50 scans per month) up to $49.95 a month for the "Business plan (500 scans a month). If you pay for a full year of service, you also get an allotment of "catch-up scans" so you can clean out your desk drawer. I could probably get by with the "Lite" version ($99 a year), which is a good deal compared to the price of the ScanSnap S1500 ($419.99 on Amazon). Personally, though, I would rather pay the extra money for the ScanSnap, but I have a do-it-yourself personality. For people who don't want to bother with scanning and organizing their documents, Shoeboxed is an excellent solution.

Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.



Disclaimer from the Creditbloggers.com editors: Always exercise caution with your sensitive documents, especially if you decide to send them out to an outside party.  Do your due diligence on any company before you send out your data. Check the Better Business Bureau for complaints or endorsements, and always read the company's fine print on its privacy and security policies to understand who handles your data, how it's protected, and if and how it might be used for other purposes or otherwise divulged to other sources.

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