If you find yourself in a lot of debt, you may be considering debt settlement or bankruptcy. Before you do this, you need to understand how this will affect your taxes overall. It may help to speak to an accountant before you make this decision, so that you can plan and do not end up scrambling to find the money that you owe the IRS.
How It Affects Your Taxes
The IRS considers the amount of debt that you have been given as income. This means you will need to pay taxes on that based on your current tax rate. One of the ways this may get tricky is that it may bump you into a higher tax bracket. This means that money may be taxed at a higher rate. It helps to talk to an accountant who can break down exactly how much you will need to be prepared to pay at the end of the year. You can also adjust your withholdings so that it is taken out during the year.
Keep Accurate Records
As you settle each debt, it is important that you record which company forgave the debt and the amount. This will give you a list to look at to make sure you have received all of the information that you need before you file your taxes. It will also allow you to double check the reports to make sure that each company reported the correct amount. Sometimes companies make mistakes and it is important to check the information to make sure it is correct.
Look for Form 1099-C
Each company that you settled debt with will send you a 1099-C form. This should list the amount of debt that was forgiven. You need to make sure that you have received all of the 1099-C forms before you file your taxes so that you do not need to amend your taxes at the end of the year.
Filing Your Taxes
When you file your taxes, you will need to take the 1099-C forms and use them to file your taxes. It helps to have an accountant when you have 1099-Cs, because your tax situation is a bit more complicated. Even if you normally file your taxes yourself, it can be helpful to use an accountant this year, since he can help you find if you have any exceptions to the rule.
Finding Exceptions for Claiming Cancelled Debts on Your Taxes
According to the IRS, there are a few exceptions to this rule. If you declared bankruptcy you do not have to claim the cancelled debts. If you can prove that you are insolvent, you may be able to write off some of the debt. If you have your student loans forgiven due to a student loan forgiveness program, you may not have to claim them. Additionally, if the debts are forgiven as a gift from a friend or family member, you do not have to claim them. You will need to file Form 982 if you have any of these exceptions.
To learn more, contact a tax preparation company like Tri-Check Income Tax Service.