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The Best Car Insurance Companies of 2021

To help you understand what makes a top-rated car insurance company, it’s important to first find out how much coverage you need. This guide will help you understand what makes a top-rated car insurance company, how much coverage you need and ways to save money when getting a car insurance quote. Don’t worry; our top […]

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Source: thesimpledollar.com

How Iceland Can Teach Us A Lesson in Risk from the 2008 Financial Crisis

In his new book, Svein Harald Øygard uses the invaluable financial lessons he learned as Central Bank Governor of Iceland during the 2008 financial crisis to analyze risk in the world of finance and economics. Iceland became an extreme example of financial ruin when the financial crisis hit. Øygard took on the role of Central […]

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Source: thesimpledollar.com

1099-C Cancellation of Debt—the Most Hated Tax Form

1099 c cancellation of debt

Taxes can get confusing—just looking at the names of some of the forms is enough to make your head spin. Take Form 1099-C Cancellation of Debt for example. It reports canceled debt to the IRS. And the IRS considers that canceled debt to be taxable income that has to be reported on your income tax.

What Is a 1099-C Cancellation of Debt?

Craig W. Smalley, EA, founder, and CEO of CWSEAPA, LLP, and Tax Crisis Center, LLC, describes Form 1099-C as “… a document sent by a bank when they have canceled a debt. For instance, if you have negotiated with your credit card company to pay them a lesser amount than you owe them, the difference would be reported on this form.”

What Craig leaves out is that the form applies only to the canceled debt of only $600 or more. It applies whether the debt is canceled or forgiven, which is really the same thing. The IRS defines canceled debt as “If your debt is forgiven or discharged for less than the full amount you owe, the debt is considered canceled in the amount that you don’t have to pay.”

What Craig’s comment also leaves out is that canceled debt is essentially money you’re earned because you haven’t had to repay it. So, it’s money in your pocket, hence to the IRS, it’s income—taxable income.

If you’ve had a debt canceled, expect to see a 1099-C arrive in your mail, as “the bank [or lender] is required to send this form, because it [the debt] is taxable income,” Smalley said.

And expect to ensure the income from canceled debt reported on your 1099-C is included in your tax bill or falls under a provision that either:

  • Doesn’t consider that debt income
  • Allows you to exclude that debt as income

See Form 1099-C and How to Avoid Taxes on Canceled Debt for information on exceptions and exclusions.

Bruce McClary, the vice president of communications at the National Foundation for Credit Counseling, said the 1099-C is an important reason to “be familiar with the tax consequences when considering debt settlement as an option. You don’t want to be blindsided by a costly IRS bill when you may already be struggling financially.”

Why Did I Get a 1099-C?

Four of the most common reasons that debt is canceled are:

  • You settled a debt for less than what you originally owed and the creditor picked up the remaining balance, known as debt forgiveness. This can include personal credit card debt that is canceled.
  • You didn’t pay on a debt for at least three years, and there was no collection activity on that debt for the past year.
  • Your home was foreclosed and your deficiency—the difference of what was owed and the value of the home—was either forgiven or you haven’t paid it.
  • Your home was sold in a short sale, and you made a deal with your lender to pay less than what owed.

Still not sure why you received this form? Look at Box 6 on Form 1099-C. Box 6 shows a code that explains why the lender sent it. IRS Publication 4681 breaks down the codes as follows:

  • A—Bankruptcy
  • B—Other judicial debt relief
  • C—Statute of limitations or expiration of deficiency period
  • D—Foreclosure election
  • E—Debt relief from probate or similar proceeding
  • F—By agreement
  • G—Decision or policy to discontinue collection
  • H—Other actual discharge before identifiable event

Receiving a 1099-C doesn’t necessarily mean that your debt is paid or canceled. That depends on why you received the 1099-C in the first place. If you received it because you settled your debt, then your debt is resolved. However, if you received it because you haven’t made any payments on a debt for three years and the debt collector hasn’t tried to collect in the last year, your debt is not in the clear and you may still owe the lender money.

However, the debt hasn’t been canceled, so you don’t yet need to consider it as part of your taxable income.

What to Do if You Get a 1099-C

First, don’t panic. Some debt-related items aren’t considered income and therefore won’t impact your tax bill. Other items can be excluded as income.

One of the biggest exclusions is canceled debt when you were insolvent—in other words, broke. If you can prove a debt was canceled due to insolvency, you don’t have to include that canceled debt as income or pay taxes on it. Smalley said, “… if you are insolvent [one of, meaning you have more liabilities than assets, certain cancelations would not be taxable. You have to fill out another form, and you have to make sure that you have evidence to support that you are insolvent.”

Debts discharged due to a bankruptcy aren’t reported as income either. Additionally, any student loans that are forgiven after you have worked in your field for a specific amount of time also don’t include any of the canceled debt as income.

See Form 1099-C and How to Avoid Taxes on Canceled Debt for information on these and other exceptions and exclusions, including bankruptcy and certain student loan debt.

Next, make sure you file with your 1099-C in the year you receive it. You have to file a 1099-C in the tax year you receive one. You can visit the IRS website for more details on filling out a 1099-C and getting it filed.

Finally, understand the amount on the 1099-C is the amount you’re expected to pay taxes on. However, there are those exceptions and exclusions.

There’s No Statute of Limitations on a 1099-C

As long as a debt has not been paid or canceled, there’s no statute of limitations on when a lender has to submit a 1099-C. If the lender files a 1099-C with the IRS, however, they have until January 31 to have it in your mailbox.

You can receive a Form 1099-C on an old debt at any time. The lender isn’t required to file a 1099-C if it still wants to collect or to notify you if it has intended to stop trying to collect. The lender can continue trying to collect indefinitely. That’s good for you only in that the canceled debt doesn’t then become income you have to pay taxes on.

If You Get a 1099-C on Debt You Paid

If you pay a debt and then get a 1099-C, McClary advises, “First and foremost, contact the issuer of the 1099-C and ask them to make the necessary corrections. They will need to send you a corrected 1099-C in time for you to file taxes.”

McClary also noted that if asking for a correction 1099-C doesn’t work, “the IRS has a dispute process you can use. This requires that you reach out to the IRS and let them know you wish to submit a complaint about an incorrectly issued 1099-C. They will provide you with Form 4598 that you will have to attach to your tax return, along with any additional documentation that supports your claim.”

How Does a 1099-C Affect my Credit?

The 1099-C form itself doesn’t have a direct impact on your credit score. However, whatever behavior lead to your receiving the 1099-C likely will affect your credit. For example, say you didn’t pay your debt and it was sent to collections. Having an account in collections has a negative effect on your credit. See Will a 1099-C Hurt My Credit Score? For information.

Curious about how your credit is fairing? Take a look at your free credit report summary on Credit.com and you’ll not only see two of your credit scores but also get some insights on what you’re doing well and what areas of your credit profile could use some work.

This article was originally published January 26, 2017, and has since been updated by another author.

The post 1099-C Cancellation of Debt—the Most Hated Tax Form appeared first on Credit.com.

Source: credit.com

Should You Transfer Balances to No-Interest Credit Cards Multiple Times?

Karen, our editor at Quick and Dirty Tips, has a friend named Heather who listens to the Money Girl podcast and has a money question. She thought it would be a great podcast topic and sent it to me. 

Heather says:

I had a financial crisis and ended up with a $2,500 balance on my new credit card, which had a no-interest promotion for 18 months when I got it. That promotional rate is going to expire in a couple of months. I have good credit, and I keep getting offers from other card companies for zero-interest balance transfer promotions. Would it be a good idea to apply for another card and transfer my balance so I don't have to pay any interest? Are there any downsides that I should watch out for?

Thanks, Karen and Heather! That's a terrific question. I'm sure many podcast listeners and readers also wonder if it's a good idea to transfer a balance multiple times. 

This article will explain balance transfer credit cards, how they make paying off high-interest debt easier, and tips to handle them the right way. You'll learn some pros and cons of doing multiple balance transfers and mistakes to avoid.

What is a balance transfer credit card or offer?

A balance transfer credit card is also known as a no-interest or zero-interest credit card. It's a card feature that includes an offer for you to transfer balances from other accounts and save money for a limited period.

You typically pay an annual percentage rate (APR) of 0% during a promotional period ranging from 6 to 18 months. In general, you'll need good credit to qualify for the best transfer deals.

Every transfer offer is different because it depends on the issuer and your financial situation; however, the longer the promotional period, the better. You don't accrue one penny of interest until the promotion expires.

However, you typically must pay a one-time transfer fee in the range of 2% to 5%. For example, if you transfer $1,000 to a card with a 2% transfer fee, you'll be charged $20, which increases your debt to $1,020. So, choose a transfer card with the lowest transfer fee and no annual fee, when possible.

When you get approved for a new balance transfer card, you get a credit limit, just like you do with other credit cards. You can only transfer amounts up to that limit. 

Missing a payment means your sweet 0% APR could end and that you could get charged a default APR as high as 29.99%!

You can use a transfer card for just about any type of debt, such as credit cards, auto loans, and personal loans. The issuer may give you the option to have funds deposited into your bank account so that you can send it to the creditor of your choice. Or you might be asked to complete an online form indicating who to pay, the account number, and the amount so that the transfer card company can pay it on your behalf.

Once the transfer is complete, the debt balance moves over to your transfer card account, and any transfer fee gets added. But even though no interest accrues to your account, you must still make monthly minimum payments throughout the promotional period.

Missing a payment means your sweet 0% APR could end and that you could get charged a default APR as high as 29.99%! That could easily wipe out any benefits you hoped to gain by doing a balance transfer in the first place.

How does a balance transfer affect your credit?

A common question about balance transfers is how they affect your credit. One of the most significant factors in your credit scores is your credit utilization ratio. It's the amount of debt you owe on revolving accounts (such as credit cards and lines of credit) compared to your available credit limits. 

For example, if you have $2,000 on a credit card and $8,000 in available credit, you're using one-quarter of your limit and have a 25% credit utilization ratio. This ratio gets calculated for each of your revolving accounts and as a total on all of them.  

Getting a new balance transfer credit card (or an additional limit on an existing card) instantly raises your available credit, while your debt level remains the same. That causes your credit utilization ratio to plummet, boosting your scores.

I recommend using no more than 20% of your available credit to build or maintain optimal credit scores. Having a low utilization shows that you can use credit responsibly without maxing out your accounts.

Getting a new balance transfer credit card (or an additional limit on an existing card) instantly raises your available credit, while your debt level remains the same. That causes your credit utilization ratio to plummet, boosting your scores.

Likewise, the opposite is true when you close a credit card or a line of credit. So, if you transfer a card balance and close the old account, it reduces your available credit, which spikes your utilization ratio and causes your credit scores to drop. 

Only cancel a paid-off card if you're prepared to see your credit scores take a dip.

So, only cancel a paid-off card if you're prepared to see your scores take a dip. A better decision may be to file away a card or use it sparingly for purchases you pay off in full each month.

Another factor that plays a small role in your credit scores is the number of recent inquiries for new credit. Applying for a new transfer card typically causes a slight, short-term dip in your credit. Having a temporary ding on your credit usually isn't a problem, unless you have plans to finance a big purchase, such as a house or car, within the next six months.

The takeaway is that if you don't close a credit card after transferring a balance to a new account, and you don't apply for other new credit accounts around the same time, the net effect should raise your credit scores, not hurt them.

RELATED: When to Cancel a Credit Card? 10 Dos and Don’ts to Follow

When is using a balance transfer credit card a good idea?

I've done many zero-interest balance transfers because they save money when used correctly. It's a good strategy if you can pay off the balance before the offer's expiration date. 

Let's say you're having a good year and expect to receive a bonus within a few months that you can use to pay off a credit card balance. Instead of waiting for the bonus to hit your bank account, you could use a no-interest transfer card. That will cut the amount of interest you must pay during the card's promotional period.

When should you do multiple balance transfers?

But what if you're like Heather and won't pay off a no-interest promotional offer before it ends? Carrying a balance after the promotion means your interest rate goes back up to the standard rate, which could be higher than what you paid before the transfer. So, doing another transfer to defer interest for an additional promotional period can make sense. 

If you make a second or third balance transfer but aren't making any progress toward paying down your debt, it can become a shell game.

However, it may only be possible if you're like Heather and have good credit to qualify. Balance transfer cards and promotions are typically only offered to consumers with good or excellent credit.

If you make a second or third balance transfer but aren't making any progress toward paying down your debt, it can become a shell game. And don't forget about the transfer fee you typically must pay that gets added to your outstanding balance. While avoiding interest is a good move, creating a solid plan to pay down your debt is even better.

If you have a goal to pay off your card balance and find reasonable transfer offers, there's no harm in using a balance transfer to cut interest while you regroup. 

Advantages of doing a balance transfer

Here are several advantages of using a balance transfer credit card.

  • Reducing your interest. That's the point of transferring debt, so you save money for a limited period, even after paying a transfer fee.
  • Paying off debt faster. If you put the extra savings from doing a transfer toward your balance, you can eliminate it more quickly.
  • Boosting your credit. This is a nice side effect if you open a new balance transfer card and instantly have more available credit in your name, which lowers your credit utilization ratio.

Disadvantages of doing a balance transfer

Here are some cons for doing a balance transfer. 

  • Paying a fee. It's standard with most cards, which charge in the range of 2% to 5% per transfer.
  • Paying higher interest. When the promotion ends, your rate will vary by issuer and your financial situation, but it could spike dramatically. 
  • Giving up student loan benefits. This is a downside if you're considering using a transfer card to pay off federal student loans that come with repayment or forgiveness options. Once the debt gets transferred to a credit card, the loan benefits, including a tax deduction on interest, no longer apply. 

Tips for using a balance transfer credit card wisely

The best way to use a balance transfer is to have a realistic plan to pay off the balance before the promotion expires.

The best way to use a balance transfer is to have a realistic plan to pay off the balance before the promotion expires. Or be sure that the interest rate will be reasonable after the promotion ends.

Shifting a high-interest debt to a no-interest transfer account is a smart way to save money. It doesn't make your debt disappear, but it does make it less expensive for a period.

If you can save money during the promotional period, despite any balance transfer fees, you'll come out ahead. And if you plow your savings back into your balance, instead of spending it, you'll get out of debt faster than you thought possible.

Source: quickanddirtytips.com

Why Are Interest Rates Higher on Investment or Rental Properties?

Loans on investment properties often have higher interest rates than loans on second homes. Read on to find out more on getting great mortgage rates on these properties.

The post Why Are Interest Rates Higher on Investment or Rental Properties? appeared first on The Simple Dollar.

Source: thesimpledollar.com