Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!Question: I had $20,000 worth of credit card debt forgiven last year, and now the IRS is claiming I owe back taxes on that money. Was I supposed to include the forgiven debt on my tax return?
Answer: I hate to be the bearer of bad news, but canceled debt is considered taxable income by the IRS. Your creditor may have sent you a 1099-C, showing the forgiven debt. The IRS also receives a copy of this, and will slap you with a tax bill that can make your jaw hit the floor.
Canceled debts should be listed as income on line 21 of Form 1040.
While canceled debt that resulted from a foreclosure is exempted from your income (thanks to the Mortgage Debt Forgiveness Act), credit card debt that is forgiven is absolutely taxable.
I’m so sorry you are in this position. Your best bet at this point is to resolve your back tax debt as quickly as possible, either through an installment agreement, or if your financial situation is dire, you may be able to be placed on Not Currently Collectible status. While your debt does not go away, you will at least be protected from forced collections until your money outlook improves.
Question: Roni, I wasn't able to finish calculating my estimated tax payment. Is there any way I can get an extension? If not, is there a penalty if I don't get the payment sent to the IRS for a couple more days?
Answer: The IRS does not offer extensions for estimated tax payments. If you are late, for whatever reason, you should pay them as quickly as possible, and you should expect a penalty for underpaying your taxes. I know, it seems strange, but according to the IRS, those payments ensure you are paying enough taxes. Failure to pay by the due date means you have underpaid your tax obligation. That penalty is imposed on each underpayment for the number of days it remains unpaid.
Generally, the penalty will be imposed when you file your tax returns. Last year’s penalty for underpayment was 4% for the number of days the payment remained unpaid. So, a few days will probably not hurt too badly, but it can add up quickly. So make every effort to file on time, and start your calculations a little earlier for your June payment.