There are times when you have to fill out a Form 1099 and will have to pay taxes on that amount because you earned an “income” on your debts. For instance:
- When you settle out a debt with a credit card company and the difference between what you pay and what you owed is greater than 600.
- When you go through a short sale and the difference between what you owed and between what the bank accepted is greater than 600.
Sometimes if you are considered insolvent, you will not have to pay taxes on your short sale or debt settlement. You will be considered insolvent if immediately before your short sale or debt settlement your liabilities are more than the fair market value of your assets. Just remember, unlike bankruptcy there are no exemptions to your assets you have to consider everything including: retirement accounts and insurance.
If you believe you were insolvent and shouldn't have to pay taxes on your short sale or debt settlement, you'll need to complete Form 982.