As everyone knows this Friday is April 15, the day we our taxes are due. For many this can be a very stressful time as you go through your w2’s and your receipts and calculate all your expenses. No one wants to end up paying more than they should or end up paying too little and risking an audit by the IRS down the road.
One major oversight people tend to have when doing their taxes is not realizing what might be owed on debts they settled. A settled debt is anytime a creditor agrees to take less than the whole amount for a payoff of the debt. Creditors often agree to settle debts that are past due so that they can avoid taking a client to court for full payment and so that they can guarantee they will be able to recoup at least some of the money they are owed. What most people aren’t aware of is that when a debt is settled the difference of that balance and what was paid can be counted as income for your taxes. Let’s say for instance that you had a debt of $100,000 that you were able to settle $60,000 then you would have $40,000 that a creditor could send you a 1099 tax form for.
Now, while they can send you a 1099 for that amount you may not actually be required to be taxed for that amount. There are forms you can file your taxes such as a 982 waiver form that claim insolvency to protect you from owing. This form can only be done on certain circumstances. What we at CRE Credit Services recommend if you have settled a debt in the past year is to be sure to discuss it with a tax professional before you file. A tax professional will be able to help you determine what if any of the settled amount can be taxed and what you can do reduce the tax penalty.