Beware of the Debt Settlement Tax - What to Look For, What to Do
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're settling your debt for less than you ow, the tax laws consider this the same as "earning" money. One example would be if you took out a loan for $10,000 and were unable to pay it back. If you settled for $6,000, you have essentially pocketed $4,000. This really gets the attention of the IRS.
It's possible that at some point in the past, the U.S. tax laws allowed for this to happen with no tax implications. Unfortunately for you, the IRS is smart about such things, and has closed any loophole that may have existed in the tax law.
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 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.
The debt settlement tax comes as a surprise to many people, who don't realize that they owe taxes on their so-called profit or gain until the IRS comes to audit them. Don't let it 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. - 23223
If you're settling your debt for less than you ow, the tax laws consider this the same as "earning" money. One example would be if you took out a loan for $10,000 and were unable to pay it back. If you settled for $6,000, you have essentially pocketed $4,000. This really gets the attention of the IRS.
It's possible that at some point in the past, the U.S. tax laws allowed for this to happen with no tax implications. Unfortunately for you, the IRS is smart about such things, and has closed any loophole that may have existed in the tax law.
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 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.
The debt settlement tax comes as a surprise to many people, who don't realize that they owe taxes on their so-called profit or gain until the IRS comes to audit them. Don't let it 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. - 23223
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. You can discover the secret facts about the debt settlement tax at Sean's website, which can be found at http://www.debtpayofftips.com
posted by X - Men @ 6:08 AM
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