Chintamani Abhyankar, is a well known expert in the field of finance and taxation for last 25 years. He has written many books explaining inside secrets of the magic world of personal finance. His famous eBook Stop donating your money to IRS which is now running in its second edition, provides intricate knowledge and valuable tips on personal finance and income tax.
If you have ever owed money on a credit card or loan and you were successful in getting the debt cancelled, you felt like the weight of the world was off your shoulders. The collection calls stopped and you felt out in the clear air where you could breathe again, and you are, except for the IRS.
Let’s say that you were $10,000 in debt to a credit card company and that you successfully negotiated that debt down to $5000. The credit card company is willing to cancel $5000 of your debt and act as if you never owed it, but not the IRS. The Internal Revenue Service will treat the cancelled $5000 as income and you will owe taxes on an additional $5000 on your income tax return for that year.
When your creditor who forgave the debt goes through the process required to “erase” that debt, they will issue you a form 1099 to sign. After you sign it, they will forward it to the IRS. The Internal Revenue Service will treat that $5000 as “other income,” related to line number 21 on your form 1040 income tax return.
The only exemption to this process is in the event the debt forgiven was in relation to your primary residence; that the debt reduced was a mortgage or Home Equity Line of Credit (HELOC). Otherwise, you are on the hook to the federal government for the applicable taxes on $5000 additional income. That’s not good news for someone who thought he was out of the woods regarding this debt.
That is why; if you are in financial trouble, don’t just jump at the chances offered you to reduce your debt. It is good that you were able to get a successful negotiation with your creditor, but you must carefully weigh all the implications surrounding any deal related to your debt. There are contingencies, loopholes, and complications to any financial negotiation. You must go into these things fully and absolutely prepared.
If you have decided to represent yourself in such negotiations, it is going to take a whole lot of research to be certain you don’t miss anything (like Internal Revenue Service regulations) that could potentially cause you even more trouble.
It is therefore recommended, that in matters of serious financial restructuring, you consult a professional financial advisor and/or an attorney. In this way, you know you will receive the advice of experienced professionals who can manage the results of your financial management to best reflect your needs and interests, hopefully without IRS surprises.
- Related Videos
- Related Articles
- Ask / Related Q&A
FBAR - U.S. TAXPAYER REPORT OF FOREIGN BANK & FINANCIAL ACCOUNTS - FORM TD F 90-22.1
By: Gary S. Wolfe, Esq. | 01/12/2009Form TD F 90.22-1 is required to be filed by every U.S. person for each calendar year in which such person has a financial interest in, or signature or other authority over, any foreign financial accounts with an aggregate value exceeding $10,000 at any time during the calendar year.
Casualty (Theft) Loss
By: Gary S. Wolfe, Esq. | 01/12/2009Section 165 of the Internal Revenue Code of 1954 provides for the deduction of losses arising from theft. The term Theft . . . converting any criminal appropriation of another’s property to the use of the taker, particularly including theft by swindling, false pretenses, and any other form of guile.
Voluntary Disclosure Program: Don't Risk Being Investigated
By: KevinThorn | 01/12/2009Voluntary Disclosure Program deadline may have passed, but not the opportunity for offshore account holders to still come forward under the IRS regular procedures. Otherwise face possible criminal prosecution and jail time for tax evasion.
Voluntary Disclosure Program – You Must File Before the IRS Contacts You
By: KevinThorn | 01/12/2009U.S. taxpayers with undisclosed offshore accounts that missed the October 15th Voluntary Disclosure Program are still able to still file a voluntary disclosure under the IRS regular procedures before the IRS contacts them. Taxpayers could be subject to criminal prosecution and jail time for tax evasion.
Tax Debts and the Taxpayer Advocate Service
By: Roni Deutch | 01/12/2009Have you ever dealt with an IRS representative who is less than helpful? This is a frustrating predicament for taxpayers that just want to put their IRS tax debt behind them so they can move on with their lives. However, it is easy to forget that the IRS is staffed by human beings with all the common foibles of ordinary people.
The Challenges of Being a US Taxpayer Living Abroad
By: Roni Deutch | 01/12/2009If you thought filing a tax return every year as an American citizen was overwhelming, then you may be astounded to learn how difficult paying taxes are for a U.S. citizen living abroad. All American citizens are required to pay their taxes, regardless of whether they are living and/or working outside the country.
Divorce Settlement Agreements – Six tax breaks that divorced or divorcing individuals need to know about now
By: John Faggio | 30/11/2009If you’re divorced or in the divorce process and need some tax relief, take advantage of these tax breaks, which can benefit both divorced parents.
Peace of Mind
By: David Pedersen | 30/11/2009IRS Tax Debt Relief
How to review your credit report with an expert eye
By: Chintamani | 01/12/2009 | CreditYour credit report is an exclusively important document in your life. It carries weight in almost every aspect of your life. A credit score lowered by just a few points can literally cost you thousands of dollars in raised interest rates over a course of time.
Fix Credit Report Errors Fast
By: Chintamani | 01/12/2009 | CreditStudies suggest that as many as twenty-five percent of all credit reports include errors. Such errors can lower your FICO scores by as much as fifty points. When you find an error on your credit report, you want it fixed as soon as possible
Easy ways to gear up your credit report
By: Chintamani | 01/12/2009 | CreditYour credit report contains both the good and bad aspects of your credit history. Most all the monetary transactions you participate in are going to be in your credit report. There are some easy methods, however, to make your credit report appear more remarkable.
Is Incorrect Information on Your Credit Report Hurting You?
By: Chintamani | 01/12/2009 | CreditMany entities glean information from your credit report. Your lenders, certainly, check your report before accepting your loan requests. Credit card companies use credit reporting more than any other single business entity. Mortgage companies, employers, satellite television providers, cell phone companies, landlords, all seek out your credit report in order to get ideas on your character and your credit worthiness.
Are You Sure You Want to Cancel Your Credit Card?
By: Chintamani | 01/12/2009 | CreditSome consumers erroneously believe that by canceling their credit cards they will erase bad credit from their credit report. Some believe that before applying for a car loan or mortgage, they should cancel credit cards to make things look better on their report. Still more cancel their cards in order to avoid the temptation to over spend. This reasoning is all seriously incorrect and a really bad idea.
An Easy method to harm your credit score!
By: Chintamani | 01/12/2009 | CreditCredit card transactions reflect the bulk of your credit score. There is no doubt that canceling a credit card, for any reason, will lower your credit score. Still, if you are not using the card, but you have to pay the fees anyway, what prevents you from canceling?
How is My Credit Score Determined?
By: Chintamani | 01/12/2009 | MortgageMany people don’t really understand how credit scores work or how they are determined. These people are often shocked to discover the reality of their FICO score is not what they had imagined.