IRS Taxes on Cancellation of Debt

Posted on August 27, 2021

IRS Taxes on Cancellation of Debt

You are happy that your debt was cancelled, but then you get to know that you need to pay taxes on the cancelled debt. It feels unjust, but that is how the IRS works. It treats a cancelled or a forgiven debt as income, and therefore taxable.

If you haven’t reported the forgiven or cancelled debt to the IRS, it may be seen as unpaid taxes. To stay in the good books of the IRS, you will need to pay taxes on the cancelled debt before they begin to send you IRS notices. The first step is to calculate the taxes you will need to pay to the IRS on the amount of debt settled.

Here is what has to say about calculation of taxes on cancelled credit card debt.

“The amount of federal income tax on $957 depends on many factors. If I were to hazard a guess, it would be about $240. That assumes you are in the 25% tax bracket — in other words, you pay 25% of every additional dollar of income on your return.

If your income after deductions is less than about $35,000 (about $70,000 if you are married and you file jointly) you may be in the 15% tax bracket. In that case, an additional $957 will only cost you about $144 in income tax.

It’s never going to be exact. Many credits and deductions have limits and phase-out ranges that depend on your adjusted gross income. An additional $957 in income can set off a complicated chain of tax events. Perhaps the best way to determine how much it would affect you is to use tax software. You can find online software that doesn’t take your credit card until you’re ready to file — if at all. I highly recommend letting the software do the hard work for you.”

Many times people who cannot pay their credit card bills settle for a lesser amount. In such cases you need to report the settlement to the IRS. It is best to take the help of tax services such as tax resolution companies or tax professionals to negotiate the terms of the agreement because in many cases IRS penalties and interest can be forgiven.

Taxpayers who do not know about the inclusion of debt forgiveness or cancellation end up getting calls from the IRS regarding the collection of the unpaid taxes. At such a time, taxpayers must calculate the taxes that need to be paid and hire the services of a reputed tax resolution service to help them get an advantageous settlement with the IRS.

In case you receive a refund, here is a tip from Fox Business.

“Most Americans expect a refund check every year. The average refund for the 2011 tax year was almost $3,000. If you’re one of those who expect a refund every year, you may hardly notice a difference of $144 to $240 in your tax bill. If you usually cut it closer, however, you may want to plan ahead.”

Many taxpayers end up in a problem with the IRS because they are not aware that they need to pay taxes on cancelled or forgiven debt. You can enjoy the benefits of a cancelled debt and also keep the IRS happy by using the help of a tax expert. Your tax help will ensure you save on taxes, penalties and interest, and resolve the issue quickly and smoothly.