Confusion Over Canceled Mortgage & Credit Card Debt

As tough economic times continue, more and more consumers are seeking to negotiate reductions to their credit card debts, as the NY Times points out their new article titled Credit Bailout: Issuers Slashing Card Balances.

As they confront unprecedented numbers of troubled customers, credit card companies are increasingly doing something they have historically scorned: settling delinquent accounts for substantially less than the amount owed.

The practice started last fall as the economy worsened. But in recent months, with unemployment topping 9 percent and more people having trouble paying their bills, experts say this approach has risen drastically.

They say many credit card issuers have revised internal guidelines to give front-line employees the power to cut deals with consumers. The workers do not even have to wait for customers to call and ask for a break.

“Now it’s the card company calling you and saying, ‘Let’s talk turkey,’ ” said David Robertson, publisher of the credit industry journal The Nilson Report.

Although it may be getting easier to negotiate with credit card companies, the IRS still considers this canceled debt taxable income. Which is creating some confusion since they changed the tax code to not tax canceled mortgage debt, which occurs when a bank allows some one out their mortgage for less than the original value.

One of my favorite blogs, Don’t Mess With Taxes, examined this issue in a new blog entry. Check it out at trading credit card debt for a tax bill.

IRS Offers Tips to Avoid Recovery Rebate Credit Confusion

According to their newest press release, the IRS is urging taxpayers and tax preparers to make sure they properly determine eligibility for the recovery rebate credit before they file their 2008 federal tax returns.

Some individuals who did not get the economic stimulus payment, and a smaller number of those who did, may be eligible for the recovery rebate credit. However, most taxpayers who received the economic stimulus payment last year will not qualify for the recovery rebate credit on their 2008 federal income tax return.

An early sampling of tax returns shows about 15 percent have errors involving the recovery rebate credit. Some tax returns erroneously claim the credit, do not claim the proper amount of recovery rebate credit or mistakenly enter the amount of the stimulus payment they received on the recovery rebate credit line.

To avoid delays in tax refunds, it is critical that taxpayers know the correct amount of the stimulus payment they received last year, if any, to help determine whether they qualify for the recovery rebate credit now.

The amount of the stimulus payment will not be entered directly on the tax return. For people using a paper tax return, the stimulus payment amount will be required when completing a related worksheet. For people using tax software, the stimulus payment amount will be needed as part of the return preparation process.

Confusion with Tax Forms

With all of the new tax laws recently passed, IRS will not be able to update 2006 tax forms. Which means millions of people may miss out on valuable tax breaks. The IRS has updated their forms online and will be working to publicize the tax breaks to prevent confusion. For all of the updated tax forms that you will need, be sure to check out the IRS’s form page.