How to LEGALLY avoid paying income tax when settling debts for less than the full balance
I have a client who is considering settling and I did some research:
You do NOT owe income tax after settling collections if you were INSOLVENT
Because the MORTGAGE and the value of the home are included in the insolvency calculations, MOST of the many millions with mortgages greater than the value of their homes qualify for the IRS exemption from paying tax on forgiven debt.
Just about all people with collections should NOT have to pay tax on discounts negotiated with creditors because they are exempt. Obviously, wealthy people don’t have trouble paying their bills.
Debt buyers rarely have the documentation to determine how much of the debt is principal and how much is interest, fees or penalties. Since only forgiven PRINCIPAL is taxable, they can’t send out 1099s if they don’t know how much of the debt is for principal.
I’m by no means encouraging debt settlement, but if you really have to settle, don’t pay the IRS more than you legally owe.
Posted by Christine on 07/08/2010 at 03:50 PM
Credit - Collection - Economic News • (0) Comments • Permalink
