It may not be tax season, but tax-paying questions still abound. This week, Internal Revenue Service spokesman Jesse Weller answers readers' queries on canceled debt income and contest prizes.
Weller is part of The Bee's "Ask the Experts" team of online specialists, who answer questions on estate planning, personal finance, banking, investments and taxes. To see more questions – or ask your own – go to: www.sacbee.com/ask.
I received a letter from my credit card company saying they will reduce my balance by 40 percent if I pay off the (remaining) 60 percent by the end of this month. They also say they will report this information to the IRS and credit bureaus. How will it affect my tax return and credit score this year?
Usually when your debt is canceled or forgiven, you must include the canceled amount in your taxable income.
There are several exceptions and exclusions that could allow part or all of debt cancellation income to be treated as nontaxable. Those include debt cancellations that are intended as a gift, cancellations through bankruptcy, or when a person is insolvent (that's when the total of all your liabilities exceeds the value of all your assets immediately before the cancellation).
For more information, see IRS Publication 4681, "Canceled Debts, Foreclosures, Repossessions and Abandonments" at www.irs.gov or order a hard copy by phone at (800) 829-3676.
Be aware: These rules can be complex, so you may want to seek professional tax advice.
I can't help with your credit score question. You might get an answer by contacting the major credit bureaus (Experian, TransUnion or Equifax) or a reputable credit counseling agency.
My wife and I recently won a brand-new car, (which we) sold since we didn't need it. Before spending any of the proceeds, we'd like to know: How much are we liable for in taxes? Even an approximation of what might be owed would be helpful. The car was valued at $17,200 and we sold it for $15,500.
Also, can we prepay and send money to the IRS?
Congrats on your win. The fair market value of the prize car is ordinarily taxable as "other income" on IRS Form 1040 (see line 21). Unfortunately, a personal-use vehicle sold for a loss is not tax-deductible.
You are wise to want to estimate your taxes on the prize. That way, you can avoid a possible penalty for underpayment of estimated taxes.
Check out Form 1040-ES "Estimated Tax for Individuals" and Publication 505, "Tax Withholding and Estimated Tax" to estimate your tax to determine if you need to increase your withholding or make estimated tax payments. You can download these forms at www.irs.gov or order them by mail at (800) 829-3676.
– Compiled by Claudia Buck
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