Look Out for the Debt Settlement Tax - What to Do About It
If you're still in debt, you're probably thinking about talking to your creditors about settling your debts for less than you owe. Beware, though. What you probably don't know about debt settlement is that it can have a great impact on your taxes.
If you negotiated a settlement with your creditors, you're basically "earning" money from your debt. Here's how it works: If you took out a loan for $10,000 and couldn't pay it back, but negotiated with your creditors for them to accept $6,000 as full payment of your loan, you've pocketed $4,000 (the difference between how much you borrowed and how much you paid back). The IRS takes a close look at these kinds of loan repayments.
I'm sure that at one point, there was a loophole in the IRS tax laws that allowed for this to happen. Unfortunately, the IRS is quick to get wise about these types of things. Just like so many other tax loopholes, this one has been closed.
As I mentioned in the example above, settling credit card debt or any other debt for less than you owe your creditor will probably result in you being held liable for the "profit" you realize after paying off your debt. Keep this in mind when you file your taxes after settling your debts.
Even though this debt settlement tax may sound like a bad thing, you're still better off having settled your debt, even after taxes. In our example, you've realized a $4,000 "gain", but at most you'll have to pay about 30% (depending on your tax bracket). Even after you've paid the tax, though, you still only paid $7,200 in repayment of a $10,000 debt. That's a 28% discount, and is still a huge bargain.
Because the debt settlement tax comes as a surprise to many people, they don't do anything about it until the IRS comes to audit them. Don't let this hidden tax take you by surprise.
If you require more information about how to plan for this tax, please talk to a CPA or other tax expert. - 23311
If you negotiated a settlement with your creditors, you're basically "earning" money from your debt. Here's how it works: If you took out a loan for $10,000 and couldn't pay it back, but negotiated with your creditors for them to accept $6,000 as full payment of your loan, you've pocketed $4,000 (the difference between how much you borrowed and how much you paid back). The IRS takes a close look at these kinds of loan repayments.
I'm sure that at one point, there was a loophole in the IRS tax laws that allowed for this to happen. Unfortunately, the IRS is quick to get wise about these types of things. Just like so many other tax loopholes, this one has been closed.
As I mentioned in the example above, settling credit card debt or any other debt for less than you owe your creditor will probably result in you being held liable for the "profit" you realize after paying off your debt. Keep this in mind when you file your taxes after settling your debts.
Even though this debt settlement tax may sound like a bad thing, you're still better off having settled your debt, even after taxes. In our example, you've realized a $4,000 "gain", but at most you'll have to pay about 30% (depending on your tax bracket). Even after you've paid the tax, though, you still only paid $7,200 in repayment of a $10,000 debt. That's a 28% discount, and is still a huge bargain.
Because the debt settlement tax comes as a surprise to many people, they don't do anything about it until the IRS comes to audit them. Don't let this hidden tax take you by surprise.
If you require more information about how to plan for this tax, please talk to a CPA or other tax expert. - 23311
About the Author:
Sean Payne is a personal finance expert who has learned through trial and error (and a lot of advice) how to get out of debt. Discover how to avoid the debt settlement tax at Sean's website, which can be found at http://www.debtpayofftips.com
posted by Mr. Forex at
6:42 AM
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