Debt Settlement & Taxes
When entering into debt settlement one of the few things that people worry about is the implications that forgiven debt will have when filing taxes at the end of the year. With the enormity of the settlement process that is going on, it can be easy to overlook this aspect. However, knowing exactly what to expect can help to make filing taxes easier.
The IRS does consider debt that is forgiven as taxable income. This means that taxes will have to be paid on the amount of money that was settled. The amount of the settlement is reported on IRS form 1099-C. This will contain all of the information that is necessary in order to file taxes and will be mailed from the creditor.
When considering how to reduce credit card debt , these taxes are an expense that should be accounted for. Usually the amount of money that is owed in taxes is far less than the amount of money that would have otherwise been paid to the creditors. By settling the debt, payments that do nothing but drive down accumulated interest can be avoided. Over a length of time, this will save money.
Fortunately, the IRS does make an option available to those who have settled their debts which can allow the taxes to be waived. This is reliant upon the debtor being insolvent at the time of the settlement. This means that the total value of all assets must be lower than the amount of debt. This is insolvency.
Since most of the people who are seeking to reduce credit card debt through debt settlement are already insolvent, it is common for the taxes to be waived after a settlement. There are exceptions though since not every single person seeking debt relief is necessarily insolvent.
Whether or not the taxes have to be paid on the amount of debt that is settled, just having the debt removed is a step towards becoming financially stable. The amount of money that can be saved by taking part in debt settlement can make all the difference.
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