DebtReductionBlog.com

It’s been a little bit since the last post. I had to go to Denver for a couple of days. Anyway, while I was on my trip, somebody asked me one of those questions that is asked so infrequently that you slap yourself in the head because you know it would be a great blog post…well, at least it could be informative if not out and out “great”.

Keep in mind that I’m not a tax professional and you should seek out a CPA.  This blog post is opinion only and should not be considered tax advice in any way shape or form.  I am not a professional tax adviser and you should never take my advice on anything ever. How’s that for a disclaimer?  I think if I had a legal department they would be proud.

The question I had from Dan S. is this: “Will I get hammered by the IRS for settling my debt?”

No, you won’t get hammered…BUT, (and it’s a big but), the creditor has to 1099 you for the debt you settled if it’s over $600.  If you owe $50,000 and you settle half then the creditor will report it to the IRS that you were basically paid the right to write that off the difference and make you responsible for the tax on the $25,000 in settled debt…which you must then claim on your taxes.

Are there ways around paying taxes on that amount?

Yes.

- If you are insolvent when you reached a settlement.
- Your non-business debt was settled as a result of Hurricane Katrina.
- You actually have a job in the field that you claimed you would work in when you got your student loan in the first place.
- You declared bankruptcy and that particular debt was in the discharge.

That’s the quick and dirty take on settled debt and taxes.  Again, ask a tax professional instead of taking my advice.  I’m not an accountant, CPA, or IRS agent.  When it comes to taxes I pull my pants down around my ankles like anybody else; one leg at a time…or something like that.