Look Out for the Debt Settlement Tax - What to Do About It
If you're currently in debt and you may be thinking about negotiating with your creditors to settle your debts for less than you owe. What you may not know about debt settlement, though, is that it can have a significant 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.
At some point in the past, there probably was a loophole in the U.S. tax laws that allowed for this kind of thing to happen. Sadly, the IRS quickly gets smart about these things. Like many other loopholes in the tax law, this one has been closed.
As in our example above, if you settle credit card debt or any other type of debt for less than you owe, you will probably be held liable for whatever "profit" you realize after settling your debt. Remember this when it's time to file your taxes after settling your debts.
Even though this may sound like a bad thing, you still come out ahead after taxes. In our example above, the $4000 you realized as a gain might be taxed at 30%, depending on your tax bracket. However, even when you add the $1200 tax, you've still only paid $7200 to clear a $10,000 debt. That's still a bargain in my book.
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. - 23159
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.
At some point in the past, there probably was a loophole in the U.S. tax laws that allowed for this kind of thing to happen. Sadly, the IRS quickly gets smart about these things. Like many other loopholes in the tax law, this one has been closed.
As in our example above, if you settle credit card debt or any other type of debt for less than you owe, you will probably be held liable for whatever "profit" you realize after settling your debt. Remember this when it's time to file your taxes after settling your debts.
Even though this may sound like a bad thing, you still come out ahead after taxes. In our example above, the $4000 you realized as a gain might be taxed at 30%, depending on your tax bracket. However, even when you add the $1200 tax, you've still only paid $7200 to clear a $10,000 debt. That's still a bargain in my book.
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. - 23159
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. Learn how to avoid being trapped by the debt settlement tax at Sean's website, where you'll find a unique "get out of debt course" that really works.
posted by X - Men @ 4:00 AM
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