@Anonymous wrote:
I just received this response from a friend who works at the IRS.
Another friend of mine settled a credit card debt with BA. Was not told that there would be a 1099-C coming.
The tax return was all done and ready to be submitted when the 1099-C came in. The tax return was amended to include the 1099-C. Two things happened....
1. 5k he put into an IRA was no longer tax deductible (his income was boosted too high?
2. His refund of 2k changed to a tax bill of $3500.
I asked my friend who works for the IRS about the taxing...why does the IRS get 1/2 of the settlement amount?? Hardly seems fair! What is the tax rate on the settlement?
The response was this,
"Ok to answer your question, it taxes SS taxes, 15.4%, plus 10% withholding, plus 15-25% nominal income tax rate. they trea tis as though you earned the income and no taxes were paid ."
Yes, the math adds up to say that the IRS gets 40.4 - 50% of the amount that was written off in a settlement!
NOT FAIR!
I am still waiting to hear back if the same applies to medical bills being settled.
Not fair is right!
He's got 5k to put into his IRA?
Now his income is too high for the IRA contribution to be deductible??
And now he has to pay something extra in taxes that he didn't expect???
I'm crying my eyes out for this guy. Boo-Hoo.
He had the money for his IRA, but not the credit card company? Truly, a man of high integrity. 5k makes a lot of monthly payments, if he had the stamina to meet his obligations.
THWH.
