I have a client who divorced. He received a letter from the IRS stating he owes taxes on $19000 of canceled debt. He didn’t receive a 1099-C.
In the divorce he was required to pay 75% of debts, she 25%. The full debt was around $25000 for a car, held in both names.
She got the car and subsequently wrecked it, did not pay it off, and the loan was ultimately canceled.
Is there a way he can get out of paying taxes on this? He doesn’t seem like he had any gain, so I was hoping he could qualify for some relief.
What you actually have here is a common misperception about divorce and a specialized tax question.
On the divorce front, it doesn’t matter what the agreement was between the couple. They can legally terminate their marriage but that does not terminate the legal contract with the lender. If the car was financed in his name only or jointly, he is still responsible for the entire loan or in this case the canceled part of the debt.
However, when it comes to his full tax liability for the car loan, that gets a bit more complicated as you can see in this previous question.
Your client really needs the advice of a qualified tax professional who can provide expert assistance on how to treat the 1099-C resulting liability.
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