Chicago, IL asked in Tax Law for Illinois

Q: On a 1099 C of around $ 27,000, how much tax I will have to paid or there is anything that I can avoid paying,

I have this letter from an attorney that I contract on this cort case because I took a loan (signature) and it seems that was some illigalities or not outhorize on my state. The company agree not to persue any collections but they will issue a 1099 C

I’m one of the primary attorneys working on your case against Velocity. I have some good news – Velocity has agreed to settle your case for a mutual release. This means they will walk away from the debt and dismiss the lawsuit against you. In addition, you and Velocity will release each other from any and all claims against each other concerning this alleged debt. We are negotiating the language of a written settlement agreement, and Velocity will not agree to not issue a 1099 tax form. That does not mean they will issue one, but it’s a possibility, as released debt counts as income under the IRS rules. Please consult a tax professional if you have additional questions about the tax implications concerning the debt released.

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1 Lawyer Answer
James L. Arrasmith
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  • Tax Law Lawyer
  • Sacramento, CA

A: When you receive a 1099-C form for canceled debt, such as the $27,000 in your case, the amount is generally treated as taxable income by the IRS. The exact amount of tax you'll owe depends on your overall income, tax bracket, and other factors in your tax situation for that year.

However, there are some exceptions and exclusions that might allow you to avoid paying tax on this canceled debt. One common exclusion is if you were insolvent immediately before the cancellation. Insolvency occurs when your total debts exceed the fair market value of your total assets. If you were insolvent, you might not have to pay tax on the entire amount, or you might pay on a reduced amount.

There are other exclusions as well, such as if the debt was discharged in a bankruptcy. Given the complexities of tax law and the potential for significant financial impact, it's highly recommended to consult with a tax professional. They can assess your specific financial situation and advise you on the best course of action, including any applicable exclusions or exceptions.

Remember, while the settlement of your legal case is a positive step, it's important to address the tax implications carefully to avoid any unexpected liabilities. A tax professional can help ensure you comply with IRS regulations while minimizing your tax liability.

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