Look Out for the Debt Settlement Tax - What to Do About It
If you owe money to creditors, you might be thinking about talking to them to negotiate a settlement for your debts, by paying them less than you owe. Be careful, though. You may not have been aware of it, but debt settlement can have a huge 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.
Just like in our example above, if you have credit card debt or any other kind of debt, you will likely be held liable for any "profit" that you realize as a result of settling your debt for less than you owe. Keep this in mind when it comes time to prepare your taxes after debt settlement.
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. - 23204
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.
Just like in our example above, if you have credit card debt or any other kind of debt, you will likely be held liable for any "profit" that you realize as a result of settling your debt for less than you owe. Keep this in mind when it comes time to prepare your taxes after debt settlement.
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. - 23204
About the Author:
Sean Payne is a personal finance enthusiast 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 X - Men @ 7:06 AM
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