Are you Insolvent?
When an individual can no longer meet his/her financial obligations with lenders as debts become due, the individual is insolvent.
The above is important to keep in mind when engaging in debt settlement with credit card companies. Debt settlement is when you negotiate with creditors to pay a percentage, for instance 25%, of your total debts as payment in full, thus avoiding bankruptcy. When this happens, you need to keep an eye out for the taxman. The IRS considers the 75% net savings as income. The reason is that when you received the borrowed cash, you did not pay tax, and you would have had to repay the debt using future earnings.
However, if you were insolvent, where your total liabilities exceed your assets, at the time of your debt forgiveness, then you may exclude a portion or the entire amount of the tax owed. The key point to remember here is, "at the TIME of the debt forgiveness." It is therefore very important to know your level of insolvency when you reach a settlement with a creditor.
Here are two examples of insolvency:
Example 1: Your assets are worth $35,000 and your debts total $45,000, so you are insolvent to the tune of $10,000. You settle a debt with a creditor who agrees to forgive $8,500. You do not have to report any of that money as income on your tax
return.
Example 2: Your assets are worth $35,000 and your debts still total $45,000, but the creditor writes off a $14,000 debt. You don't have to report $10,000 of the income, but you will have to report $4,000 on your tax return.
Below is a calculator that mirrors the IRS guidelines for determining if you owe taxes at the time of your debt settlement. Per the IRS, when determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account).
To download the spreadsheet version, click here.
If your insolvency is due to credit card debt then download my book. You will get debt relief by learning how to negotiate away your debts for pennies on the dollar.
Your Insolvency Result If the calculation shows a negative number, and this number is equal to or greater than the total sum of your debt forgiven, then you do not owe taxes on your debt settlement. However, if the debt forgiven is greater than the negative number shown, then you will owe taxes on the difference, as per example number two shown above. If the calculation shows a positive number, you are not insolvent and you will owe taxes on your debt settlement. The sum owed depends on your tax bracket. For instance, if you are in the 25% tax bracket, and your creditors forgave $10,000, then you would owe $2,500 in taxes. However, you will still be ahead of the game. This tax bill will be far less than the interest you would have paid credit card companies. You will also eliminate the emotional stress of being in debt. Download This book!
If your insolvency is caused by credit debt, medical bills, or other unsecured debt, then download this book. This book shows how to negotiate your debts for pennies on the dollar. As the title indicates, you will be out of credit debt within six months.   |
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