God required the Israelites to forgive their debts every seven years (Deut. 15:1,2), and Solomon instructed the people to negotiate debt settlements if they were trapped in debt (Prov. 6:1-5). This is the biblical foundation of our system of debt relief.
God wants you to be free from debts you cannot pay, but you must be careful not to let the IRS undo what God has done by putting your back in bondage for taxes.
The IRS requires creditors who have forgiven debts to send out IRS Form 1099's for the amount of the debt forgiveness. And people are wondering if they are going to be taxed on their debt forgiveness.
The answer for most people is no. The reason is that even the Congress and the IRS know that you can't get blood out of a turnip. So if your assets (less home equity and personal possessions) are still less than your liabilities after the debt is forgiven, you qualify for the "insolvency exception," and the debt forgiveness is not taxable. Debts discharged on your home and debts discharged in bankruptcy also are not taxable.
Do not, however just throw away that non-taxable 1099 form. The IRS has a special reporting procedure for excluded debt forgiveness income, and if you do not show the 1099 amount on your tax return, they will tax you and send you a bill. So be sure to follow their procedure by attaching a Form 982 to your return. To claim the insolvency exception check Box 1(b) and put the 1099 amount on Line 2. You may also have to reduce some carryover tax attributes such as net operating losses, and if so, you will need to complete Part 2 of the form. Get help if you need it, but do not let yourself be needlessly taxed by failing to file the Form 982.
Oh, and if you've been wrongfully taxed in prior years, you can file an amended return, Form 1040-X, to claim a refund for tax years 2015 (until about April 15), 2016 and 2017. You probably should get professional tax help with a 1040-X.
Finally, don't let your creditors scare you with threats of debt relief tax. It's a scam to get more money out of you.
Just remember good old Form 982 and smile.
Ron Allen is a Christian businessman, CPA and author who serves in local, national and international ministries, spreading a message of reconciliation to God, to men and between believers. He is founder of the International Star Bible Society, telling how the heavens declare the glory of God; the Emancipation Network, which helps people escape from financial bondage; and co-founder with his wife, Pat, of Corporate Prayer Resources, dedicated to helping intercessors.
Get Spirit-filled content delivered right to your inbox! Click here to subscribe to our newsletter.
Help Charisma stay strong for years to come as we report on life in the Spirit. Become an integral part of Charisma’s work by joining Charisma Media Partners. Click here to keep us strong!
Dr. Mark Rutland's
National Institute of Christian Leadership (NICL)
The NICL is one of the top leadership training programs in the U.S. taught by Dr. Mark Rutland. If you're the type of leader that likes to have total control over every aspect of your ministry and your future success, the NICL is right for you!
FREE NICL MINI-COURSE - Enroll for 3-hours of training from Dr. Rutland's full leadership course. Experience the NICL and decide if this training is right for you and your team.Do you feel stuck? Do you feel like you’re not growing? Do you need help from an expert in leadership? There is no other leadership training like the NICL. Gain the leadership skills and confidence you need to lead your church, business or ministry. Get ready to accomplish all of your God-given dreams. CLICK HERE for NICL training dates and details.
The NICL Online is an option for any leader with time or schedule constraints. It's also for leaders who want to expedite their training to receive advanced standing for Master Level credit hours. Work through Dr. Rutland's full training from the comfort of your home or ministry at your pace. Learn more about NICL Online. Learn more about NICL Online.