Is "Cancelled Debt" Income subject to Self-Employment Tax?

Question

This was a personal loan. Both my husband & I were self-employed at the time. However, this was a personal loan from my father-in-law (Before anybody jumps on me for not paying it back, let me explain that my husband suffered a hemmorhagic stroke which left him with brain damage and confined to a wheelchair. I had to quit work to care for him, and I had to sell the property to pay off as much debt as I could and still have enough to purchase a small home in town. We live on extremely limited income!) I reported it on my 1040 on line 21(other income). I use TurboTax. TurboTax didn't calculate owing any self-employment tax on those monies, however I got a letter from the IRS stating that my return has undergone an examination, and I owe the self employment tax on those monies plus penalties, interest.................... I have searched and searched, and find no information that leads me to believe that a personal loan that is wrote off is subject to self-employment tax.

We were not issued a 1099. I reported the income because I was trying to be honest.

Answer 1

No, just regular tax at whatever your tax bracket is.

Answer 2

First of all, why do you consider this cancelled debt? Did your father-in-law decide that you'll never pay it back and write it off as bad debt? There'd be no advantage to his doing that. Were there any specific terms to this loan? Is it in writing? Would your father-in-law agree to call it a gift? If so, then it may not be taxable at all. If it is cancelled debt and you incurred all the other losses you mention, you may be able to exclude it from your income. Under the insolvency exclusion, you can exclude cancelled debt to the extent your were insolvent (assets minus liabilities). Example, if just prior to the cancellation of debt your assets were worth $50,000 but your liabilities were $75,000 you are insolvent by $25,000. If the "loan" was for $26,000 you can exclude $25k and need only report $1000 as income. Cancelled debt is taxable for federal taxes but not self-employment taxes. Good luck.

Answer 3

It is whatever tax bracket you are in 15%, 25%, etc. That is the amout you will owe. For example $10,000 of debt is written off as part of a settlment, and you are in a 25% tax bracket you will have to pay Uncle Sam $2500 next year. Assuming the creditor files a 1099-C.

Answer 4

No, you don't have to pay self-employment tax on the forgiven loan. Actually, I would not have called it a "loan" at all if it were me. You don't have to pay taxes on GIFTS. You could have considered that a gift from your father in law rather than the forgiveness of a loan. If the amount was more than $12,000, then --crazy as it sounds-- your father in law would have had the obligation to pay taxes on the excess.....IF he reported it.

In my opinion, you could have skipped listing this altogether and called it a gift.

Answer 5

particular and you already understand that it rather is. because of the fact the self employment tax quantity is your social secure practices and medicare taxes on the internet funds in in your self employed business company time table C and SE of the 1040 income tax return. the internet income quantity is entered on the 1040 tax variety internet site a million business company income and extra to all your different gross international income and then whilst the income tax return is thoroughly and precise the taxable quantity would be challenge to the federal income tax at your marginal tax fee.

Answer 6

Cancelled debt is reported as other income. Since you were self employed, probably IRS is taking the stand that this debt was your business debt so it is subject to self-employment taxes.
If the debt had nothing to do with your business, then you have to prove this fact to IRS.
Another point, check how did your father in law treat this amount. Did he treat this as his business loss?

Answer 7

"Cancelled Debt" is unearned income and thus not subject to self-employment tax, but is subject to regular tax.

Answer 8

No, just to income tax.

Answer 9

It's income, so if you're self-employed you will need to pay all taxes on it.