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(The following is for educational purposes only and should not be
considered tax advice. For tax advice, please consult with a
licensed professional for advice about your situation).
For many consumers seeking out a
debt settlement
program to help them solve their debt troubles, the issue regarding
taxes seems to be rather unclear. While many consumers are aware of
the fact that the IRS can tax you on the amount that you saved on a
particular settlement, the majority of debtors are not familiar with
the details surrounding the tax implications if you work with a
debt settlement
company. Here is a list of details that should help clarify who,
when, and how you may be taxed on the savings from a given
settlement reached while you are enrolled in such a program:
1. If the amount of savings is $600 or more on a particular debt
amount you may be taxed on that savings by the IRS. If the savings
are under $600, than you cannot be taxed on that amount that
resulted from the settlement.
2. Any bank, credit union, loan company, credit card company, of
financial organization is obligated to send you a 1099-C form to
you, the consumer, as well as the IRS for you to fill out at the end
of the tax year.
3. The consumer must report the amount of savings from the settled
debt on that form as “income.”
Exceptions to these stipulations:
Here are a handful of exceptions to where you may be exempted
from the taxes. Please verify and confirm your situation with a
licensed tax professional before figuring out whether or not you
qualify for exemption.
1. If you are considered insolvent at the time a particular
settlement is reached. Insolvency refers to the situation where the
debt amount of the consumer exceeds the total amount of that
consumer’s assets. If you are solvent, your assets are worth more
than your outstanding debt amount.
*If you calculate that your debt amount exceeds your assets and you
are in fact insolvent, you can fill out an IRS Form 982 and include
that form with your tax return so you are not taxed on your savings.
2. If you filed bankruptcy and the debt was discharged.
3. The debt, if it is non-business, was actually cancelled as a
result of Hurricane Katrina.
4. If you currently work for an employer or in the profession that
you promised you would when you took out a student loan in the past. |
