“Taxes” Archive
Jun
19
As my loyal readers now, I–through my attorney–am currently negotiating with AMEX to settle nearly 20K in credit card debt. It is likely that the debt will be settled for something around 50% of the total due, which means nearly 10K of the debt would be forgiven by the creditor. I hadn’t thought at all about tax consequences until my attorney mentioned this to me. Much to my surprise, it looks like my debt ‘forgiveness’ may carry with it some serious tax implications.
According to the IRS Publication 525, the amount of cancelled or forgiven debt is generally considered taxable income; this includes income. This seems like a very cheap tactic by the IRS to collect more revenue, arguably from taxpayers who cannot afford it. The amount of debt forgiven isn’t taxable in certain situations:
- The debt is canceled in a bankruptcy case under title 11 of the U.S. Code
- The debt is canceled when you are insolvent. However, you cannot exclude any amount of canceled debt that is more than the amount by which you are insolvent
- The debt is qualified farm debt and is canceled by a qualified person
- The debt is qualified real property business debt
- The cancellation is intended as a gift
Now, as much as I would like to think AMEX would give me 10K in debt forgiveness as a gift, this isn’t likely. The only way I can avoid having to pay income tax on the forgiven debt is to prove I was insolvent at the time of the debt forgiveness. Given I will have sold off most of my assets by the time I repay AMEX–arguably IN ORDER to pay AMEX–I will have very little in the way of assets. I rent an apartment and I lease a car so I have very little in the way of tangible, liquid assets. I will absolutely have to consult with an accountant for my taxes this year.
The moral of the story is that while if you end up negotiating a debt settlement with a creditor, be sure to include in your calculations the tax implications. How much debt forgiveness would it take to push you into the next tax bracket? Is it worth it? These are all questions you should consider before making any settlements. When in doubt, talk to an accountant or other qualified professional.
For all of you who made it this far, be sure to enter the Windows Vista giveaway. This is a gift from me to you, so don’t worry about any tax implications.
