If you have done your homework on debt settlement, you know that the IRS requires any cancelled debt of $600 or more to be reported as additional income on your 1099 Form. Many consumers worry that this will greatly affect their tax return and prevent them from saving money. The truth is that this should not really affect your decision due to the two following factors:



1. If you are paying taxes because you negotiated a debt, it is because you saved money! If you saved $5,000 on a cancelled debt, the IRS is not going to require you to pay them $5,000. Instead, they will ask for a percentage of the total. Having to pay the IRS, for example, 10% of that amount means that you still saved $4,500. The amount of taxes you pay will never be more than the amount of money you saved in the settlement and on future interest payments. You will always come out ahead.





2. The fact is that the majority of clients are never required to pay taxes on their cancelled debts because of something known as insolvency. According to IRS Publication 908, if what you owe is greater than what you own at the time of the settlement, you are considered insolvent and are not required to claim the cancelled debt. In the case that you are somewhat solvent at the time, you are only required to claim up to the amount of your solvency. For example, if you save $10,000 but are only solvent by $3,000, the government will tax you on $3,000, but not the other $7,000. This exception prevents most individuals from having to pay taxes on what they saved in a debt negotiation program.



In conclusion, worrying about paying taxes on cancelled debt should be the least of your worries. The most important issue is to eliminate your high-interest credit card debt and avoid filing bankruptcy. For more information, contact a professional tax advisor or a Debt Settlement expert.