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Form 982

If you settle a debt and receive a 1099 form, you'll owe tax on the amount of money you were not required to pay to settle the debt. For example, if you owed $15,000 and settled for $5,000, you will owe income tax on the $10,000 difference if the debt collector files a 1099 form.

But you may be able to reduce your tax burden. Under certain circumstances, filing IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, could allow you to reduce or exclude the amount by which you benefit from the discharge of indebtedness that is included in your gross income.

In other words, under certain circumstances you may not have to pay tax on the difference. The form is, well, complicated. My best advice is to consult a tax specialist. That might cost you a little money, but it could also save you a lot of money in taxes.

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