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Remember when I said how the tax code triggers audits of poorer people by design? The cancellation of debt is one of the big triggers. For example. You have a car. You lose your job and have a some other unforeseen financial issue. It gets repossessed. You owe 20k.
The dealership sells it for 11k. (Cars depreciate like shit). That 9k remaining? Is treated like income. You receive a 1099-C (Cancellation of debt income statement). You don’t even know what it is. So you don’t claim it. Fast forward a year later.
The algorithm (set by the tax code) “catches” that you have unreported income via the 1099-c. So now you owe the taxes on that income plus penalty and interest for under reporting. If you make over 1 million dollars YOU DON’T EVEN HAVE TO CLAIM THE 1099-C. It’s. By. Design.
This happens when you take money from your 401k early. When you settle credit card debt. Things that affect poor/middle class people.
Now credits. Earned income credit, additional child tax credit, education credits. ALL of these are calculated based on your income on a sliding scale. Per earlier you have 9k in 1099c income you didn’t claim. That extra 9k increased your income and now affects those credits.
So you received more refund or had a smaller tax debt than you should have because you didn’t report all your “income”. So you gotta pay it back or it increases your tax. PLUS interest and penalties. See how it works?
So that’s my tax lesson of the day. Republicans AND Democrats are responsible for that tax code. It needs a complete overhaul.
