The Debt Settlement Tax Can Bite You If You're Not Careful
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.
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.
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.
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.
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.
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. Get an amazing, free mini course about the debt settlement tax at Sean's website, where you'll find a unique "get out of debt course" that really works.
