You May Owe Taxes on Settled Debts
Negotiating a lower payment is one way to pay off your credit card debt at a lower cost. When the lender agrees to settle your debt for a lower amount, say $500 on a $1,000 debt, part of the debt is cancelled. It’s good news for you in the short run, but you could end up paying taxes on the cancelled amount.
The Internal Revenue Service requires businesses to report cancelled debts. Those businesses must also send you a form letting you know the debt was cancelled. When you prepare your taxes for that year, you’re required to include the cancelled amount. That could increase your tax liability. Learn more about cancelled debts.
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