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.
When you pay off the debt for less than you owe, you're effectively "earning" money. For example, if you take out a loan for $10,000, and then were unable to pay it back, but settled for $6000, you've effectively pocketed $4000. This kind of thing gets the IRS's attention in a hurry.
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 need any more details on how to deal with this tax, please check with your CPA or another tax expert. - 23218
When you pay off the debt for less than you owe, you're effectively "earning" money. For example, if you take out a loan for $10,000, and then were unable to pay it back, but settled for $6000, you've effectively pocketed $4000. This kind of thing gets the IRS's attention in a hurry.
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 need any more details on how to deal with this tax, please check with your CPA or another tax expert. - 23218
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 @ 6:54 AM
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