IRS taxes forgiven truck loan as income
A man's brother-in-law had a $19,000 truck loan written off after job loss, but the IRS treated the forgiven amount as taxable income, resulting in a $3,300 tax bill. The family views this as unfair, prompting questions about debt forgiveness rules. Financial experts explain the IRS policy and potential exceptions.
The incident began when the brother-in-law lost his job and could no longer afford payments on his $19,000 truck loan. The lender eventually wrote off the remaining balance, forgiving the debt. However, as required by tax law, the lender reported the cancellation of debt to the IRS, classifying it as income to the borrower.
This led to an unexpected $3,300 tax bill for the brother-in-law. The querier, writing to MarketWatch, expressed frustration: "My brother-in-law's $19,000 truck loan was written off, but the IRS charged him $3,300 in taxes. This seems unfair." The forgiven amount is indeed treated as taxable income under IRS rules, unless specific exclusions apply, such as bankruptcy, insolvency, or qualified principal residence indebtedness.
In this case, the brother-in-law did not qualify for insolvency relief, as his liabilities did not exceed his assets at the time of the forgiveness. Financial planner Carolyn McClanahan noted that "debt forgiveness is considered income because the lender is essentially giving you money by not collecting what you owe." She advised checking for exceptions and consulting a tax professional to explore options like amended returns if circumstances allow.
The story highlights broader implications for consumers facing financial hardship. During economic downturns, loan forgiveness can provide relief but often comes with a tax consequence. The IRS Form 1099-C, issued by lenders for forgiven debts over $600, triggers this reporting. Taxpayers in similar situations are encouraged to review IRS Publication 4681 for details on exclusions.
No timeline for the event was specified beyond the job loss preceding the default, but the tax assessment followed the lender's write-off in the same tax year. This personal anecdote underscores the importance of understanding tax implications before pursuing debt relief.