It is a typical circumstance in the borrowing and lending world that you find yourself plunged with medical bills and credit card debts you can’t easily get out from. When the debt collector starts calling you, most of the time, he or she uses some scare tactics to place you on the defensive side and push you to pay back, not considering your current financial hardship. But in reality, while these lending companies come out full of rant and bristle, they don’t have the real legal muscle to commit to what they say. This article will provide you some tips to settle tax debt.
In actual fact, you have many options in fixing your tax debt. The assurance of settling hundreds and thousands of due balances for pennies on the dollar is the wish of many consumers and the guarantee of countless late-night advertisers. And today, if there is one debt reduction procedure that catches the public interest and limelight, it is no other than the process to settle IRS tax debt.
However, before closing a deal and signing a huge part of your life in the transaction, it’s critical to realize that there can be profound tax consequences in having some or all of your debts forgiven. In reality, there are only a few consumers who had their debts canceled. And in the end they’ve found out that their pardoned debt balances were counted as additional taxable income reflected on their annual tax returns. In some instances, their IRS bills became $300 to $400 for each $1,000 forgiven.
The Tax Consequences
Maintaining an Individual Retirement Account (IRA) to build your retirement nest egg comes with distinct tax advantages. However, these benefits do not influence or constructively affect your debt settlement efforts.
Learning how to settle tax debt requires getting educated about the tax consequences of debt settlements. While you may deem it unreasonable, the IRA tax rules have no consideration about associating the forgiven amounts by your lenders as income in your income tax return. In their assessment, the forgiven debt was converted from being a loan to income the point that such amount was no longer required to be reimbursed. However, the amount of money that can be added in your income may be minimized or completely eradicated in specific conditions, most of which will necessitate you to look for professional tax help to make sure that your estimations are precise.
The only “exceptions” that fall under the IRA tax deduction rules are the following:
- Forgiveness as a Gift – These loans that are absolved as a gift will not incur income tax. However, they may procure estate and gift tax.
- Student Loans – Nurses, doctors, teachers, and other professions may benefit from nonprofit or government programs so their debt balances will be forgiven. The debts excused under these programs will not be included as revenue.
- Deductible Debt – These are expenditures which would have been otherwise deductible on your tax return and may be excluded from income.
Any amount that your lender had forgiven will be reflected on IRS Form 1099-C. Note that all 1099 forms are the commencement from which the exceptions are deducted, to include any other “exclusions.”
Tax-Free Debt Settlements
While you may think that the Internal Revenue Service doesn’t have compassion when managing debt settlements, there are certain circumstances in which the IRS will provide a free pass. These scenarios are confusingly termed as exclusions, in contrast to the exceptions mentioned above. If you meet the following criteria, the full amount of the debt pardoned is excluded from your income.
- Bankruptcy – If you have filed a Chapter 11 bankruptcy and specific debts are excused under a bankruptcy court order, the debts in general are excluded from your income.
- Insolvency – The Internal Revenue Service commonly permits taxpayers who have debt more than their net worth before the debt cancellation, to rule out the forgiven amounts from their revenue.
- Farming and Business Real Estate – The IRS lets debts integrated to professional farming and real estate acquisition as a component of a business to be absolved from income when forgiven.
The process to settle tax debt can be a tricky affair so make sure it never develops into IRS wage garnishment. Although you might soon realize the general idea behind exceptions, exclusions, and the amount owed, it’s highly recommended that you seek advice from a financial expert to manage your debts, evaluate your retirement investments, and provide you with some investing tips.
If you get the approval from a tax professional, make sure you do the debt settlement offer yourself first before getting the assistance of a debt settlement firm to perform it for you.