Do I Have to Pay Taxes on Money I Saved in A Debt Negotiation Program?

If you have done your homework on debt negotiation, you have most likely found out that the IRS requires any cancelled debt of $600 or more to be reported on a 1099 Form as additional income. Many individuals believe that this will greatly influence their tax return and prevent them from saving money. While in some cases this is a valid concern, the two following reasons explain why taxes will not greatly affect your financial situation:

1. If you are paying taxes after negotiating a debt, it is because you saved a significant amount of money! Let’s say you saved $5,000 on through negotiation. The IRS will not ask for $5,000; instead, they will require you to pay a percentage of the total. For example, paying the IRS 10% of that amount means that you will still save $4,500. The amount of taxes you pay will never be superior to the amount of money you saved in the negotiation. Don’t forget all the money you will also save future interest payments. No matter how you look at it, you will always come out ahead.

2. The fact is that most consumers are never required to pay taxes on their cancelled debts because of the rule of “insolvency”. According to IRS Publication 908, if your debts are greater than your assets at the time of the negotiation, you are considered insolvent and are not required to report the cancelled debt. In the case that you are solvent at that time, you are only obligated to claim up to the amount of your solvency. For example, if you save $15,000 but are only $3,000 solvent, Uncle Sam will tax the $3,000, but not the remaining $12,000. This exception prevents most consumers from ever paying taxes on what they saved in a debt negotiation program.

In conclusion, concerning yourself about paying taxes on cancelled debt should be the least of your worries. It is more important to focus on eliminating your high-interest credit card debt and avoid filing bankruptcy. For more information, contact a professional tax advisor or a []Debt Negotiation expert.

Scott Wallitsch is a certified IAPDA debt arbitrator for DebtorSolution. He provides []Debt Help and []Debt Consolidation advice to clients who are looking to become financially free and economically independent.

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