Debt Settlement Tax Consequence
Debt Settlement Tax Consequence
How much would the IRS take from the forgiven debt?
First, it's not just any amount forgiven debt. Consumers must understand that debt settlement is for credit card balances that are relatively high, as in $10,000 and above and have not been paid in months, as in 5 or 6 past due. These accounts are what the IRS considers as bad debts and the original creditors must write off after half a year of non-payment.
If the original creditor is not aggressive in suing its clients for judgment, the account would be passed on to a third party collection agency, in which its understood that it's impossible to collect 100% of the amount owed. Debt settlements usually happen with third party collection agencies rather than with the original creditors, although, some original creditors agree to a settlement tooon higher terms.
When original creditors write off debts, they get a tax break themselves, but they lose income. So for a profit driven business, it makes much more sense to settle for less than the full amount, rather than get nothing.
Debt settlement programs aim to reduce the consumer's balance to more or less half, and so for a $10,000 debt, $5,000 off is not bad.
How much would a $5,000 forgiven debt be taxed?
It's better for the consumers to consult with a tax expert but it's usually 25% of the forgiven debt.
Is there an exemption?
Yes there is, if the forgiven debt is below $600, you don't have to report the forgiven amount as income on your return.
Let's look at the picture again. You owe $10,000 and $5,000 was forgiven. Then you pay 25% of $5,000, which $1,250, you do the math after. Is it true that you weren't able to save anything from debt settlement?
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