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Q: Will I owe money to the IRS for my reduced settlement?

A. Creditors are required to report canceled debts exceeding $600 to the IRS and you are supposed to report the same as income on your annual tax return. However, the IRS permits you to write off any “income” from canceled debts up to the amount by which you were “Insolvent” at the time. Therefore, unless you have a positive net worth, then you ordinarily will not be obligated to pay taxes on the forgiven amounts. Additionally, if you do not qualify as insolvent non principal amounts such as fees accumulated on the account may be deducted from the amount reported. Refer to: www.IRS.gov Publication 908

• Note: You should consult a tax advisor for advice specific to your situation. This should not be considered tax advice.


 

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