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.
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 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.
Although this may sound like a bad thing to you, you're still ahead of the game after taxes. In our example, the $4,000 "gain" you realized may be taxed at 30% (which depends on your tax bracket), meaning that you owe a $1,200 tax. Even after the tax, though, you've still only had to pay $7,200 to settle a $10,000 debt. You've gotten a 28% discount, which is a bargain in my estimation.
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 need any more details on how to deal with this tax, please check with your CPA or another tax expert. - 23212
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.
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 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.
Although this may sound like a bad thing to you, you're still ahead of the game after taxes. In our example, the $4,000 "gain" you realized may be taxed at 30% (which depends on your tax bracket), meaning that you owe a $1,200 tax. Even after the tax, though, you've still only had to pay $7,200 to settle a $10,000 debt. You've gotten a 28% discount, which is a bargain in my estimation.
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 need any more details on how to deal with this tax, please check with your CPA or another tax expert. - 23212
About the Author:
Sean Payne is just a normal guy 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, where you'll find a unique "get out of debt course" that really works.
posted by X - Men @ 6:08 AM
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