Debt Settlement and Taxes

Although a debt settlement plan can potentially save you thousands of dollars, one major drawback is that you may be required to pay taxes on any forgiven amount that exceed $600. According to Internal Revenue Service (IRS) regulations, that amount is considered to be income and is therefore subject to taxation. The creditor who agreed to a debt settlement with you is required to send you a miscellaneous form 1099 at the end of the year which you are required to file with your tax return next year.

The one exception to having to pay taxes on debt settlement is if you are considered insolvent. This is the term given to the situation that arises when your total liabilities exceed your total assets. It is not necessary to file bankruptcy for the IRS to grant you insolvency status. If you feel this describes your situation, you must include the IRS form 982 along with the form 1099 when you file your next tax return. The IRS will review your return and make a determination if you are insolvent or not. If you are, the amount of taxes you would owe on the debt settlement are reduced by the total amount of your insolvency.

Since IRS regulations can be complex, you are advised to seek the advice of a certified public accountant (CPA) or another tax professional before filing your return. To learn more about how you can benefit from debt settlement, submit a form today!