IRS Makes you Pay Money when you Save Money

If you pay less than the full amount of any debt the IRS makes you pay tax on that money.  An example would be if you owed $1,000 to Chase on a credit card and you settled with them for $400.  The IRS considers that $600 as income to you and you will have to pay tax on that money. 

 

How does that make any sense at all you ask?  Well I ask the same question because it isn’t money that you actually received being what INCOME would be defined as.  Money that was actually received for something or in exchange for something is what is considered income.  So where does the IRS get off in making you pay tax on that money that you save?  Because they can!  So at the end of the day you got a settlement with a creditor, that they agreed to, and now you have to pay tax on that money that you saved. 

 

Really creepy, I say! 

 

If you are in a situation where you have saved money and have a 1099C form from a creditor, find out a few things that could help you so that you may not have to pay that tax. 

 

Did you settle that account because you didn’t have the money to pay?

 

Are you in a financial situation that is not optimum and are having problems making ends meet?

 

If you answered YES to either of these questions, then you may be eligible for a tax break on those pesky taxes.  You would normally claim 33% of the saved amount as income, but if you can prove financial insolvency then you may owe nothing. Find out by going to the IRS.gov website and looking at form 982.  This form determines if you are financial insolvent or not. 

 

If you don’t do your own taxes then I would recommend you get with your tax professional and ask him that question.  You never know what could happen.  But remember, I am not a tax attorney or tax professional and you should always consult one when you have a question, I’m just letting you know that there may be a way to not pay those taxes.  On the other hand, if you have the money and DON’T have a financial hardship, then by all means, pay your taxes on the money you saved.

 

The Debt Lady says, “If you know you have options, then why would you do anything else?”