Debt Negotiation Advice
Debt settlement and taxes?
I went through debt settlement last year, paying off $25k for $10k. I learned AFTER doing this that I will get hit with a tax bill. Lovely. Today a 1099 arrived from one of the banks for the 10k they forgave. Someone at the settlement company told me I can work around this with a sharp tax preparer. At this point I'm wondering if I can trust them. So, can a tax preparer help me get around this mess?
Public Comments
- If you were insolvent at the time of the Cancellation of Debt then the COD is not taxable to the extent that you are insolvent. You are insolvent if the value of your assets is less than your liabilities. For example if the value of your assets is $100k and you owe $107k then you are insolvent by $7k. With a $10k COD, $3k would be taxable. I usually suggest professional assistance as you need to submit a simple set of financial statements to substantiate your insolvency. If you're not familiar with the basics of accounting and bookkeeping this can be a hassle.
- Read IRS pub 4681.
- If you liabilities were greater than your assets, then you will be able to exclude part or all of the forgiven debt from your income. To do this you will need to file form 982 and attach a statement of discharge of indebtedness with your tax return. These forms are complicated so you might want to seek professional advice. Richard K Master Tax Advisor HR Block This advice was prepared based upon the law in effect at the time it was written as it applies to facts provided by you. See my profile for more information.
