Forgiven Debt

Do You Owe Taxes on Forgiven or Cancelled Debt?

Do you owe creditors money you can't afford to repay? You may be eligible to have the debt forgiven or otherwise canceled. When this happens, you no longer owe your creditors the money that you used to owe them.

What you need to know is, the IRS usually treats such canceled debt as income. Income that you could owe taxes on. If you fail to report it or fail to pay taxes on the cancelled debt, you’ll end up owing penalties and interest. Over time, that could become just as big of an issue as your original debt.

When Do I Not Owe Taxes On Forgiven Debt?

In some cases, you may get an exemption and there are some circumstances in which you won't owe taxes.

Your Debt is discharged through bankruptcy proceedings: If you are in serious financial trouble, you may file for bankruptcy. By filing bankruptcy, you may have your debts discharged by the court. Bankruptcy debts,  are not considered taxable when forgiven.

You're insolvent: When you are able to settle with a creditor by paying them less than you owe them, your financial situation may be bad enough that you owe, in general, more than you own. If the IRS considers you financially insolvent, you may have either part or all of your debt excluded from taxation. If you believe that you qualify for insolvency exemption, you should hire a tax resolution professional to help make sure.

A canceled debt from friends or family:
If you borrow from friends or family and have them forgive the debt, the money forgiven is considered a gift. Gifts are not taxable income.

Tax-deductible interest: Forgiven debt that includes interest that is tax-deductible. You do not need to report the interest component as taxable income. Discharged student loans are also usually exempt from taxation.

Forgiven Debt
1040 tax form

Including the forgiven debt in your tax return

Didn't tell your tax professional about the forgiven debt? If you did not tell your tax professional about the forgiven debt, you likely won't know about the tax liability until you receive a notice in the mail about it. Usually, a creditor who forgives you over $600 sends you a 1099-C form stating the amount forgiven. If the debt forgiven is exempt, you may need to fill out a Form 982. Form 982 states how much should be exempt, and why.

What do you do if you pay taxes on forgiven debt that should be excluded?

If debt forgiven is exempt from taxes, but you still pay, you're may amend your tax return. You may amend your tax return for three years. You simply need to file Form 1040X and mention your exemption on Form 982. Working with forgiven debt can be complex. It is usually a good idea to hire a tax resolution professional to work out the details.

About Tower Tax Relief LLC

Our firm specializes in IRS Resolution, and the protection of our clients is our number one priority. We serve clients virtually or in person, whichever makes you most comfortable. If you want an expert tax resolution specialist, who knows how to navigate through the IRS storm, and will advocate on your behalf, reach out to us - Tower Tax Relief LLC. Call us today, we are ready to help - 469-206-4050. The first step will be to schedule a confidential consultation to explain your options to permanently resolve your tax problem.


How to Protect Yourself When Paying Taxes – Vital Steps You Need to Take Now

Tax season can be an unpleasant time of year for a lot of taxpayers, especially if you owe money to the IRS or State. The only thing you can do is make the most of it, prepare ahead of time, and pay the lowest amount allowed by law.

Whether you are due a refund or writing a big fat check to the IRS, there are some steps you should take after your return has been filed. Here are three critical steps to take once the tax filing deadline has come and gone.

Step #1: Print Off Hard Copies of All Your Forms and Receipts

Even if you save all of your documents on the computer and in the cloud, it is a good idea to print off hard copies and store them in a safe place. From the 1099 forms detailing your interest and dividend payments to the receipts that back up your charitable donations and business expenses, you never know when you will need this information.

You will appreciate having those hard copies on hand if your computer crashes or your cloud storage service fails. It takes only a couple minutes of printing, and those couple minutes could save you weeks of hassle down the road.

Step #2: Check Your Refund Status Or Balance Due Online

Even if you file electronically, you cannot expect instant service on your tax refund. It is the IRS after all. Even so, you should see quick action on your return and a notice that it has been accepted. Keeping an eye on your tax refund is one of the best ways to protect yourself and make sure the money you are owed does not end up in the hands of identity thieves.

This is also true if you owe money to the IRS. There have been tax identity theft cases where someone else files a tax return with your social security number, leaving you to deal with the liability or adding on to the amounts you owe.

If you use a tax filing software package, you should receive a notice by email when your return is submitted to the IRS, and another when it has been accepted. Watch your email box carefully and follow up if you do not receive those notifications within a day or two.

Once a week has passed, be sure to check the Where's My Refund page at the IRS.gov website to see where your refund stands. This handy tool provides a real-time picture of your refund status, from the time it is received by the IRS to the minute the money hits your bank account.

If you owe money, log in to your IRS account here https://www.irs.gov/payments/view-your-tax-account and check the balance to make sure it lines up with what you know you owe. If there are discrepancies, contact your tax resolution firm ASAP.

Step #3: Prepare for Next Year

You just filed your taxes, and the last thing you want to do is think about filing for next year. Despite this trepidation, now is the perfect time to start getting your ducks in a row for the filing season to come.

Start by looking at your current year's return and think about ways you could have lowered your tax debt. Perhaps you could have given more to your favorite charity. Maybe you could have increased your retirement savings rate. Knowing what you did wrong this year will make it easy to adjust your strategy and save more money going forward.

Nothing can make filing taxes a truly pleasant experience, but dealing with the IRS is something every American needs to do. Now that your tax return has been duly filed and your 1040 form is on its way to the IRS, taking the right steps can save you money down the line, protect you from identity theft and make future tax dealings a little less stressful.

About Tower Tax Relief LLC

Our firm specializes in IRS Resolution, and the protection of our clients is our number one priority. We serve clients virtually or in person, whichever makes you most comfortable. If you want an expert tax resolution specialist, who knows how to navigate through the IRS storm, and will advocate on your behalf, reach out to us - Tower Tax Relief LLC.  We’ll schedule a confidential consultation to explain your options to permanently resolve your tax problem. Call us today, we are ready to help - 469-206-4050.