Around this time of year people start coming in with 1099 tax forms which they received from former creditor. The tax prepares and accountants insist that this is income from a forgiven debt, but it is not. When an insolvent person is given debt foregiveness or files a bankruptcy and discharges debt no taxable event takes place. The IRS form that would be filed is #982; it provides that in the case of a secured debt being discharged the future basis of the property involved is reduced by the amount forgiven. Most tax payers are uneffected by this last provision, but still need to report the 1099 and declare that it is in fact not income.
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