What's Taxable

• If you owe someone $5,000 and negotiate a settlement with the creditor for half that because you have no hope of paying the full amount, you incur $2,500 in additional income for the tax year. Anytime a financial entity lets you off the hook for $600 or more in debt that you've incurred, the law requires the company to send you and the IRS a Form 1099-C reporting it. You must enter the amount on Line 21 of your 1040 return as "other income." The negotiated debt might be a student loan, credit card balance or a defaulted auto loan. In some years, it might even include a foreclosure on your home.