Many people at one time or another in their life find themselves in an unmanageable situation when it comes to credit card debt. If this is where you are at the moment, then you might be considering a debt settlement company to help you negotiate new payments that will help you get back to a new sense of financial freedom.
In many cases, this will mean that you end up paying less money than you originally owed. If that happens, it is time to consider the IRS and credit card relief. Anytime that you end up being forgiven debt, the IRS typically comes calling and increases your tax bill. Continue reading to discover if that is the case in this situation.
Debt Settlement Explained
In order to understand why the IRS may be involved, it is first important to understand what a debt settlement is comprised of. This is essentially an agreement that is entered into between someone who is in debt and the company that this debt is owed to. If successful, the person in debt will gain the advantage of paying back less money than he or she originally owes. The company will then end up writing off the remainder of the money as a bad debt.
What are the Tax Ramifications of Settling Your Debt?
If you are fortunate enough to get your debt reduced by Freedom Debt Relief, you need to be aware that it will show up on your credit report. This is because the IRS is going to look to recoup lost taxes in one way or another. The creditor will gain a tax advantage because they have forgiven a certain percentage of your debt. For your part, the IRS will then expect you to pay tax on the debt that you were forgiven. This money is treated as income.
There is a possibility that you will need to pay tax on the difference between the debt you would have owed and that which you ended up paying. The bank that granted you the settlement will be reporting that difference to the IRS as income. This means that you will need then need to report it as income on your own return when you go to file taxes. Whether or not you will need to pay taxes on that income will depend on a variety of factors.
How Much Will You Owe in Taxes?
The IRS does not have a one size fits all ruling when it comes to how much money you will owe in taxes as a result of receiving a positive debt settlement. It comes down to your personal situation and how much income you have as a whole. The normalized tax rate in the United States right now is between 10 and 37%. If you owe taxes, you will be paying this percentage in taxes based on how much of your debt was forgiven. Of course, some of this amount could potentially be offset by a variety of tax deductions that you may be eligible for.
Do You Have to Report a Debt Settlement?
The law does stipulate that you are required to report any taxable income that you receive during a given year. This includes a debt settlement. You will need to report this amount on IRS form 1099-C. Keep in mind that the IRS will also receive this form from the bank that granted you the settlement, so it is in your best interest to be upfront about the settlement and pay any taxes that are owed.
While you may end up owning some taxes on the debt settlement that you receive from a lender, it is still often worthwhile to you in the end. The taxes owed are negligible in exchange for the debt relief and lower interest rates that you can negotiate. Understanding the IRS and credit card relief will enable you to take better advantage of any settlement options that are eventually offered to you.