When you file your taxes and don’t own any property or have any real debt, things seem pretty easy. You might even wonder why or how people manage to get so upset at tax time. As you start to gain assets, debts, and dependents, taxes become more and more complicated. Soon enough, you find out there is a specific value for just about everything. The trick is learning how to correctly account for those values when it comes time to file your taxes for the year. Debt and debt forgiveness are among some of the topics you will need to address.
Debt and Taxes
When it comes to your taxes, it isn’t the debt that you have to worry about. It’s the interest you pay on the debt. In some cases, you can’t do anything at all with the interest, but in other cases, you can. The type of interest you can expect to claim as part of your deductions at tax time involve student loans and other types of debt that may be forgiven or canceled. You’ll need to ask your bankruptcy lawyer or accountant about the specific types of interest you can deduct because it depends on the amount of interest and what it is being paid on. Further, you’ll need to be aware of any new tax laws or changes concerning interest deductions.
Debt Forgiveness Can Affect Taxes
In the event you have negotiated with your creditors and paid off a debt early, you may have been given a break on the full amount. Maybe you were even behind on payments and they let you pay it off for a fraction of the amount due. In the long run, this saves them money because they don’t have to pay collection agencies, but they also get to claim a loss on the amount that you didn’t pay off. You may be required to include any discounts you’ve received when dealing with debts at tax time.
Consult a Qualified Lawyer Regarding Your Debt
It’s a good situation for you because you are relieved of some of your debt, but you still have to include the canceled debt or part that was forgiven, on your taxes. In fact, there is a specific area of your tax forms where you address this situation. As far as the government is concerned, forgiven debt can be looked at as a limited sort of income. Why is that? Because you received goods or cash that you didn’t have to pay the full amount for in return. To the IRS, this is like someone handing you cash to use or cash to buy the item you were paying for. In any case, it’s a good idea to talk with your debt lawyer about how you can handle the debt forgiveness on your income taxes.
Do you have debt that you would like forgiven or included in bankruptcy? Contact us if you have questions regarding debt forgiveness. Help your friends and family members and be sure to share the blog online.