Debt Settlement and Taxes

Debt settlement is an option that many people consider when eliminating debt. The obvious advantage of debt settlement is that you are able to eliminate your debt for a reduced amount of money. Those savings can go a long way for people. However, debt settlement carries some disadvantages as well. For one, it could have a negative impact on your credit report. It can also have an impact on taxes. The tax impact can seem negative, but it might not be depending on your situation. Here is what you should know about how debt settlement relates to taxes.

When you settle a debt, you may think it is all over with. However, forgiven debts that exceed $600 will be reported to the IRS. You will receive a 1099 form for the total amount. That amount will be considered as income for you. This means you will have to pay taxes on those funds. Essentially, you add it to your income when you file your return. That means you will have a higher tax bill. It could reduce your tax return. In some cases, it could mean that you owe taxes to the IRS.

Before you worry about this, there are some loopholes that could help. The IRS recognizes when someone is insolvent. This means that their debt exceeds their equity. For a lot of people looking to pay off debt , this is usually the case. The total debt they owe is higher than the value of the property they own. If this applies to you, you might not be liable for the taxes on that 1099 form. People who are insolvent can file a form with their tax return that explains this. That should alleviate their tax responsibility for the forgiven debt. Tax situations like these can often be tricky. Therefore, it is a good idea to talk with your tax professional. Even if you are liable for taxes, you still might save money through debt settlement.