Did You Know You Might Owe Taxes On Debt That's Forgiven? Here’s How It Works.
Did You Know You Might Owe Taxes On Debt That's
Forgiven? Here’s How It Works.
When you owe creditors money that you
can't afford to repay, sometimes you may be able to get the debt forgiven or
otherwise canceled. When this happens, you no longer owe your creditors the
money that you used to owe them.
The IRS, however, usually treats such
canceled debt as income that you've
received. Income that you could owe taxes
on. If you fail to report it or fail to pay your taxes on the cancelled
debt, you’ll end up owing penalties and interest and over time, that could be
just as big of a hassle as your original debt.
Note: If you have any
tax trouble or owe more than $10k to the IRS or state but can’t pay in full,
contact our firm today. We help people find tax relief, file years of unfiled
tax returns, and sometimes settle their tax debt for a fraction of what’s owed. Go back to our home website to learn more about how we can help you.
When
Do I Not Owe Taxes On Forgiven Debt?
In some cases, you may get an exemption
and there are some circumstances in which you won't owe taxes.
Your debt is
discharged through bankruptcy proceedings:
If
you are in serious financial trouble, you may file for bankruptcy and have your
debts discharged by the court. Such debts, while they are forgiven, are not
considered taxable.
You're insolvent:
When you are able to settle with a
creditor by paying them less than you owe them, your financial situation may be
bad enough that you owe, in general, more than you own. If you are considered
financially insolvent in this way by the IRS, you may have either part or all
of your debt excluded from taxation. If you believe that you may qualify for
insolvency exemption, you should hire a tax resolution professional, like us, to help
make sure.
A canceled debt
from friends or family:
If
you borrow from friends or family and have them forgive the debt, the money
forgiven is considered a gift, and is not taxable income.
Tax-deductible
interest:
If debt that is forgiven includes
interest that is tax-deductible, the interest component does not need to be
reported as taxable income. Discharged student loans are also usually exempt
from taxation.
Including the forgiven debt in your tax return
If you don’t tell your tax professional
about the forgiven debt, in most cases, you won't know about paying taxes on
forgiven debt until you receive a notice in the mail about it. Usually, a
creditor who forgives you over $600 sends you a 1099-C form stating the amount
forgiven. If the debt forgiven is exempt, you may need to fill out a Form 982
to state how much should be exempt, and why.
What do you do if you pay taxes on forgiven debt that should be excluded?
If debt forgiven is actually exempt from
taxes, but you still pay, you're allowed to amend your tax return for three
years. You simply need to file Form 1040X, and mention your exemption on Form
982.
Working with forgiven debt can be
complex. It is usually a good idea to hire a tax resolution professional to
work out the details.
OWE
BACK TAXES?
Our firm specializes in tax problem resolution. We serve clients virtually so don’t hesitate to reach out. If you want an expert tax resolution specialist who knows how to navigate the IRS maze, reach out to our firm and we’ll schedule a no-obligation confidential consultation to explain your options to permanently resolve your tax problem. Visit www.fairtaxsolutions.com or call (470) 305-1233 to find out more today!
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