Did you know roughly 30% of Americans have defaulted debt? Medical bills make up the highest debt, followed by student loans, auto loans, and credit cards. If someone is unable to make the payments, they may consider a debt settlement, which can help them negotiate their debts down. While people can benefit from having their debts settled, they still may incur tax fees.
Generally speaking, most of your canceled debt will be taxable. If you can settle for an amount that is drastically lower than your total debts owed, you will be taxed on any forgiven debt over $600. Your creditor will file a 1099-C form with the IRS that will detail the amount of your settled debt, and then you will receive that form from your creditor in the year that your final payment is made.
However, some canceled debt has different rules. Some forms of canceled debt can be eliminated from your taxable income, while others may be lowered or reduced but not completely erased. These are called exceptions and exclusions, respectively. Exceptions can include gifts, certain student loans, deductible debt, and prices that have been reduced after purchase. Exclusions can include discharge of debt through bankruptcy, insolvent taxpayer, or qualified farm indebtedness, to name a few.
Whether you are dealing with forgiven debt under $600 or over it, the best way to ensure you complete your taxes appropriately is to hire a tax preparer and request a 942 form. A tax expert will help you navigate the information and ensure that you are filing your taxes correctly.
Normally, even after paying taxes on settled debt, most consumers find that they can pay off their debts quicker and less expensively in a debt program (as opposed to paying off the balance with interest charges, on their own). If you’re looking for assistance with your debt, or want to explore other options, contact Golden State Debt Management to take advantage of our offer for a free consultation.
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