Tax Debt Forgiveness
Learn Why IRS Debt Forgiveness May Be Taxable Income!
Tax Debt Forgiveness - IRS tax forgiveness isn't always great for your taxes. Forgiven credit debt may be taxable income, even when you get IRS tax forgiveness there is still a tax on cancellation of debt. Start your IRS tax relief plan, Today!
Credit card debt forgiveness, When you have debts that are forgiven, you probably don't think about tax debt forgiveness and how this will affect the taxes that you are going to have to pay. You see, when it comes to the IRS, debt forgiveness is something that is often going to be taxable, which many people don't realize.
There is actually a forgiveness of indebtedness that has to be paid in many cases. Forgiven debts can help you out in some ways, but it can also increase your taxes, and if you don't realize this, you may end up in indebted to the Internal Revenue Service, not something that you want to do.
Guide To Tax Debt Forgiveness.
Understanding Cancellation of Debt Income and How It's Taxed
When cancellation of debts occur, the lender is forgiving you of all or at least part of a account you had with them.
However, this is known as irs cancellation of debt income with the Internal Revenue Service and there can be debt forgiveness that you have to pay. In many cases this is called income and is taxable.
For example, a person with $7,500 in credit card debts who negotiates to pay only $4,500 of the balance would have $2,000 in forgiven debt income. That $2,000 must be reported as "other income" on Line 21 of the 1040 tax form.
Depending on the amount of IRS debt forgiven, the taxpayer's income level, deductions and other factors, the consumer could face a sizable tax bill come April 15. The vast majority of people who owe taxes are honest people in financial trouble through no fault of their own.
The lender is supposed to report the amount forgiven to you as well as the Internal Revenue Service, and this is done on what is called a Form 1099-C, which is a form specifically designed for cancellation of debts. However, there are some exceptions to this rule when you don't have to pay taxes on cancellation of debts.
Tax Exception #1 - Bankruptcy
When it comes to tax debt forgiveness, you may not have to pay tax on the cancellation of your debts if you are going through bankruptcy. If you're going through Chapter 7 or Chapter 13 bankruptcy, the income that you get through discharged debts is actually exempt from being taxed by the government, which means this can lessen IRS tax debt.
It is a bit harder to file for Chapter 7 bankruptcy and there are a few cases where you could still be responsible for the COD income that occurs as a result of the bankruptcy proceedings.
Tax Exception #2 - Insolvency
Another point in time where there is actually tax debt forgiveness to you, even if there has been a cancellation of debt is when you are insolvent. This means that your debts are higher than the total of your assets, but you are not currently in bankruptcy.
If this is your case, then you can be exempt from the taxation by the federal government. However, if you become solvent, you will be taxed on that income.
Tax Exception #3 - Not All Canceled Debts are the Same
There are other tax exceptions to the rule as well when you can get tax debt forgiveness and avoid having to pay on cancellation of debt income.
Other exceptions include:
- Home mortgage exception
- Seller financed debt exception
- Debt forgiveness for student loans
- Qualified farm debt
- Deductible interest
- Nonrecourse loans
- And several others.
There are always exceptions out there when it comes to tax forgiveness. However, you don't want to find out later that you were supposed to pay on canceled debts and find out you now owe the IRS tax.
If you borrow money from a commercial lender and the lender later cancels or forgives the debts, you may have to include the canceled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender.
When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender.
It's a good idea to check with a good tax attorney to help you through the process if you are settling debts to make sure that you aren't going to owe any taxes to the Internal Revenue Service.
If you have an ongoing issue with the IRS that has not been resolved through normal processes, or you have suffered, or are about to suffer a significant hardship/economic burden as a result of the administration of the laws, contact the Taxpayer Advocate Service
Where To Go For IRS Tax Debt Help?
The most important thing you can do to take control of your tax debt, and get your future back on track is to do something. Take action.
Starting Today, you will have the knowledge and power in your hands to easily change your life financially!
When All Else Fails Contact Your Taxpayer Advocate Service!
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