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 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.
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.
Since the debt settlement tax is so little-known to most people, they usually don't do anything about it until after an IRS audit. Keep it in mind, and don't let this 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. - 23309
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 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.
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.
Since the debt settlement tax is so little-known to most people, they usually don't do anything about it until after an IRS audit. Keep it in mind, and don't let this 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. - 23309
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, where you'll find a unique "get out of debt course" that really works.
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