The Debt Settlement Tax Can Bite You If You're Not Careful
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.
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 I mentioned in the example above, settling credit card debt or any other debt for less than you owe your creditor will probably result in you being held liable for the "profit" you realize after paying off your debt. Keep this in mind when you 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. - 23310
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 I mentioned in the example above, settling credit card debt or any other debt for less than you owe your creditor will probably result in you being held liable for the "profit" you realize after paying off your debt. Keep this in mind when you 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. - 23310
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. Discover how to avoid the debt settlement tax at Sean's website, which can be found at http://www.debtpayofftips.com
posted by Mr. Forex at
6:42 AM
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