Tax Problems from Canceled Debt?
The main consequence of debt cancelation is the legal obligation to pay taxes on the forgiven amount. The Internal Revenue Service (IRS) considers the forgiven amount a taxable income. Borrowers getting debt relief should plan for taxes on savings they’re likely to get from debt cancelation. There are some exceptions as far as debt cancelation is involved.
Reporting Any Taxable Canceled Debt Income
The law requires creditors to report the canceled debt to the IRS and the debtor if the amount is $600 or more. They can do this by recording the canceled debt on Form 1099-C and sending it to both the agency and the debtor.
The debtor must list the income on Form 1040 and submit its income tax. Failure to do so will force the IRS to impose penalties on the taxpayer on top of demanding the payment of the tax debt.
The IRS has programs to help delinquent taxpayers settle their debts. The taxpayer can self-initiate any of the IRS programs. Seeking tax debt help from an IRS debt attorney can increase the odds of the delinquent taxpayer obtaining a favorable result.
What Are the Exceptions to Debt Cancelation?
The IRS exempts the following debts from the cancelation of debt income:
- Amounts canceled as gifts, bequests, or inheritance
- Qualified student loans that satisfy specific requirements
- Some education loan relief or repayment programs that are instrumental in the provision of health services
- Canceled student loans following the death or permanent disability of a student
- Canceled debt amounts that qualify for a deduction if the debtor, as a cash basis taxpayer, cleared it
Methods of Getting a Debt Canceled
Negotiating with Creditors
Some creditors have debt cancelation terms in their credit agreements. Others have credit relief services that borrowers can get at a small extra cost and use in certain hardship situations, including a medical emergency or a job loss. A borrower should look at the credit provisions of all creditors, identify the creditor that’s likely to cancel the debt, and initiate negotiations directly with that creditor.
Debt Relief Programs
A borrower can get a debt canceled through a debt relief program. The borrower should try his or her level best to identify a relief program that suits his or her situation.
Filing bankruptcy may be the best bet for a borrower struggling with debt. What’s more, debt cancelation doesn’t qualify as an income in bankruptcy.