Friday, May 24, 2024

Are Debt Settlement Fees Tax Deductible

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Other Options For Paying Off Debt

Do I Have To Pay Taxes On A Debt Settlement

Debt settlement can be a lifesaver for people who feel buried by their credit card bills, but there are some other options if you simply need to get a better handle on your payments.

Paying off credit card debt with a balance transfer card or a debt consolidation loan;is generally less risky than debt settlement when you do your research beforehand. Pairing a 0% APR credit card;with either of the time-tested;snowball or avalanche methods;might be quicker and end up saving you more money.

Balance transfers typically charge fees between 2% and 5%, unless you’re approved for a no-fee balance transfer card. For instance, the;Citi® Double Cash Card;charges a fee that’s equal to 3% of your balance .

The Citi Double Cash Card requires;good to excellent credit to qualify. However, the Aspire Platinum Mastercard is a balance transfer card where applicants with;fair credit have a better chance of qualifying. Its promotional interest period is shorter than most cards, at six months, but even a short no-interest period could help you get ahead if your interest is high. If you aren’t able to pay your balance off entirely before the introductory 0% APR period ends, the variable interest rate is relatively low, at 8.15% to 18.00%.;

Can A Debt Settlement Company Provide Legal Advice

No, debt settlement companies are not law firms and cannot provide legal advice.

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Tax Settlement Firm Price Tag

The majority of tax settlement companies charge their clients an initial fee that can easily run anywhere between $3,000 to $6,000, depending on the size of the tax bill and proposed settlement. In most cases, this fee is completely nonrefundable. This fee quite often mysteriously mirrors the amount of free cash the client has available. This is generally the amount of cash the company says it will save the client in tax payments.

Clients have also complained to the Better Business Bureau and the Federal Trade Commission that some of these firms have not produced any of the promised results and, in fact, the organization was a scam. Many firms also materially misrepresent their fees to clients, perhaps charging them initially with a lower fee before coming back for more once they are deeply involved in the process.

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Legal Expenses Of Employees Paid By Employers

¶;30. An employer may deduct the legal expenses incurred in defending an employee, officer or director against charges of having committed an illegal or wrongful act in the ordinary course of carrying on the employer’s business. This could include expenses incurred in relation to allegations of offences under business practices or competition law. See for example, the criteria set out in The Car Strip Ltd. v. MNR, Tax A.B.C.;361,;67 DTC;259 and the decision of the Federal Court, Trial Division, in Border Chemical Company Ltd. v. The Queen, ;2 CTC;183,;87 DTC;5391.

¶;31. An employer may deduct premiums under an insurance policy which provides for the reimbursement of legal expenses incurred by officers or directors in defending themselves against claims made against them by reason of their positions with the employer.

¶;32. Where personal legal expenses of an employee are paid or reimbursed by the employer, the amount paid is a taxable benefit to the employee. To the extent that the amount so paid does not exceed a reasonable amount, it will normally be deductible to the employer as a business expense on account of the employee’s wages or benefits.

What Is Debt Settlement

Are debt consolidation fees tax deductible? You better ...

Debt settlement is an agreement between the creditor and the borrower. Both parties agree on a reduced amount to pay off the debt in full. The borrower gets the advantage of paying a smaller amount than he owes, and the creditor gets paid;at least something instead of having to write off the entire balance.

Of course, debt settlement doesnt come without its costs to the borrower. Debt settlement will appear on your credit report as such and hurt your credit score. Also, you may have to pay taxes on the difference between what you paid and what you owed. Yes, the amount of debt you didnt pay is generally reported to the IRS as income.

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If It’s Taxable Be Prepared

If you’ve taken advantage of a debt forgiveness program, the sooner you find out about the tax implications, the better. Speak with a tax professional to find out whether you qualify for an exception. If you do, you don’t need to do anything else.

If you don’t, however, you may need to start preparing for the tax bill. A tax professional can help you run the numbers based on how much you currently have withheld from your paychecks and which deductions and credits you qualify for.

If you end up owing money, start working on a savings plan now to ensure you can afford to pay it. While the IRS offers installment plans for people who can’t afford to pay by the due date, they charge interest and a penalty until you pay in full.

General Rules For Deducting Legal Expenses

IRS regulations permit a taxpayer to deduct legal expenses under certain circumstances. You can usually deduct attorney fees related to the production of taxable income or connected to the determination, collection or refund of taxes. You can also deduct fees paid to an attorney who represents you during an IRS audit. Taxpayers cannot deduct fees paid for legal advice or representation regarding personal matters, such as defending against a criminal charge. You also may not deduct legal fees related to activities that do not produce taxable income. For example, damages awarded in a personal-injury lawsuit are not taxable, so legal fees paid to an attorney for handling the case are not deductible.

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Is Debt Settlement A Better Choice Than Bankruptcy

Bankruptcy may allow you to eliminate most of your debts quickly and this is typically referred to as a Chapter 7 Bankruptcy. In other cases, you may be required to pay back a percentage of your debts over time. This is typically referred to as a Chapter 13 Bankruptcy. Bankruptcy also offers legal protection under the court so that you dont have to worry about being sued or harassed by creditors while completing the bankruptcy process. While most reputable debt settlement firms will work to assist in minimizing calls and harassment where possible, debt settlement does not provide the guaranteed legal protection that bankruptcy does.

Chapter 7 bankruptcy is not an option for everyone and it has gone through some changes since the bankruptcy reforms of 2005. Unlike the not so distant past, it has become more difficult to qualify for full liquidation of your unsecured debts. Chapter 13 bankruptcy requires five years of court-ordered payments to a trustee, and may require you to surrender some of your assets.

Fees Paid To Settle Credit Card Debt Not Deductible

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Question for the Tax Court

Whether taxpayers had $8,768 of discharge of indebtedness income arising from and whether they may deduct the $2,126 fee they paid to the agency that negotiated that settlement. .


The taxpayers had $13,084 in credit card debt with Chase Manhattan Bank. .; Arbitronix, Inc.; negotiated a settlement with Chase on behalf of the taxpayer, whereby Chase agreed to accept $4,579 in full satisfaction of petitioner’s balance. .; Arbitronix charged the taxpayer a fee of 25 percent on the $8,505 savings, or $2,126. .; The taxpayer conceded at trial that they had $8,768 of cancellation of debt income. .; The court did not address the discrepancy between the $8,505 savings and the1099-C that stated $8,768 as the amount of debt canceled. .

Quick anecdote if I may.; Let’s assume the taxpayer is in the 15% marginal tax bracket and also pays 5% state income tax for a combined tax rate of 20%.; Their federal and state income tax on the COD income would be $8,768 x 20% = $1,754.; Adding this tax bill to the $2,126 fee, the taxpayers $8,505 savings is reduced by $3,880 for a total real savings of $4,625, approximately 53% of the $8,505.

Taxpayer’s Arguments

Commissioner’s Arguments

The taxpayer is wrong.

Tax Court’s Opinion

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How To Pay Back Taxes You Owe To The Irs

If youre getting letters from the IRS about your tax debt, you probably have a lot of questions about what to do next and how to handle paying the IRS. We have answers! Read on to learn more about your options and where you can turn for help when paying your back taxes.

Request a free tax;consult;today

Will All Of My Creditors And Collectors Negotiate With Debt Settlement Companies

Most creditors and collectors negotiate with debt settlement service providers. Debt settlement companies cannot force the negotiations and cannot force creditors to accept a settlement. Debt settlement companies do not make regular monthly payments to your creditors. Your creditors may continue collection efforts on delinquent accounts while you are enrolled in a debt settlement program. Such collection efforts can include phone calls and letters to you, charging off the account, sending accounts to collection agencies or attorneys, lawsuits and even garnishments of your wages if a judgment has been obtained. Debt settlement companies should not claim that they will be able to stop these collection activities as these activities may continue while the company is making its best efforts to negotiate your debt.

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Why Do So Few Get An Oic

First, most applicants may not qualify. They may have equity in assets or future income that can pay their tax liability before the IRS collection statute expires .;For example, a taxpayer can pay their liability if they owe the IRS $20,000 in tax debt and have a retirement account with a balance of $50,000.;The IRS will not settle with this solvent taxpayer unless the taxpayer has special circumstances.;

Second,;it may be cost-prohibitive to settle.;This means the taxpayer may not be able to fund the OIC settlement.

On March 12, 2020,;final regulations;were released that increased the OIC user fee from $186 to $205 .;While a 10% increase may seem like a lot, its only a small part of the potential cost of an OIC. The user fee usually does not prohibit many from applying for an OIC. The real cost is how much is needed to settle the tax bill.;This amount is called the offer amount and represents a calculation of how much the IRS will accept to settle a tax bill.

Third, taxpayers will not qualify for an OIC unless they have filed all tax returns and made all required estimated tax payments for the current year, if applicable. To qualify, business owners with employees must have made all required federal tax deposits for the current quarter.; In addition, taxpayers with an open bankruptcy cannot apply for an OIC.;

Can Debt Settlement Really Allow Me To Pay Back Less Than I Owe

Are Tax Preparation Fees Deductible?

If you are struggling to pay off your , medical bills, or other unsecured debt, you may be wondering if the advertisements you see on the TV, radio or the Web are for real. The main questions consumers ask are Can I really get out of debt for a fraction of the cost and pennies on the dollar? Will debt settlement help me get out of debt quickly, legally and safely? What are the effects on my credit rating and future ability to get a loan?

Below you will see a variety of questions and answers that we wanted to share with you. These are among the most commonly asked. By reading on, it is our hope that youll be able to make an intelligent decision as to whether debt settlement is the right choice for you.

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What Are Your Fees

Some of;Debmericas programs are performance based, which means that our clients do not pay any fees until settlements have been negotiated on their accounts.;However, if you are enrolled in one of Debtmerica, LLCs attorney-based debt settlement programs, then Debtmerica, LLC may receive fees prior to any settlement being obtained with a creditor. The total fees for our programs range from 20% to 24% of the enrolled debt balances that are settled. Upon each account being settled, a fee will be assessed specific to that settlement and collected from the special purpose account set up specifically to facilitate the debt settlement process.

Employees Selling Property Or Negotiating Contracts

¶;29. An employee who is entitled to deduct expenses pursuant to paragraph;8 may deduct reasonable amounts paid during the year in respect of legal costs arising from an event that by its nature is a risk normally incidental to the income earning activity. For example, a real estate agent may deduct legal fees in a defence against charges of misrepresentation in connection with an aborted sale of property. The legal expenses would not be deductible, however, if they were of either a capital or personal nature. An outlay incurred to protect the agent’s licence to earn real estate commissions and an outlay directly attributable to an automobile accident which occurred while the automobile was being used for personal purposes are examples of expenditures of a capital and personal nature, respectively.

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Topic No 504 Home Mortgage Points

The term points is used to describe certain charges paid to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Points are prepaid interest and may be deductible as home mortgage interest, if you itemize deductions on Schedule A , Itemized Deductions. If you can deduct all of the interest on your mortgage, you may be able to deduct all of the points paid on the mortgage. If your home acquisition debt exceeds the limit for your filing status, you wont be able to deduct all of the mortgage interest and points. See Publication 936, Home Mortgage Interest Deduction to figure your deductible points in that case. Refer to Topic No. 505 and Can I Deduct My Mortgage-Related Expenses? for more information on deducting mortgage interest and points.

Points are allowed to be deducted ratably over the life of the loan or in the year that they were paid. You can deduct the points in full in the year you pay them, if you meet all the following requirements:

  • Your main home secures your loan .
  • Paying points is an established business practice in the area where the loan was made.
  • The points paid weren’t more than the amount generally charged in that area.
  • You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them.
  • You use your loan to buy or build your main home.
  • Forgiven Debt That Is Taxable

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    This area belongs almost exclusively to the debt settlement domain, but also could include personal loans you default on. Here are examples of both

    Suppose you have $25,000 in credit card debt and choose a debt settlement program to get the number down where you could actually pay it off. The debt settlement company comes back with good news that if you pay $15,000, the card company will forgive the last $10,000. You jump for joy! The IRS jumps for your wallet.

    The card company will send you an IRS Form 1099-C at the end of the year that reports the $10,000 as income. The IRS says you got $10,000 worth of goods and services with that money, but never paid it back, so its income and goes on Line 21 of your tax return.

    The same thing happens if you take out a personal loan for $5,000 and default on it after paying back just $1,000. You had every intention and obligation to repay the loan, but things got tight and you cant pay the other $4,000.

    Once your creditor stops;attempting to collect;from you, the sum of $4,000 effectively has been given to you. At that point, it is considered income, you will receive a 1099-C form and will be taxed as such.

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    Average Debt Settled By Debt Settlement Companies

    A study by the Center for Responsible Lending showed that on average debts are settled at 48% of the outstanding balance. But that balance increases 20 percent due to late fees and other charges the creditor might impose during negotiation.

    Then there are the fees to the debt settlement company, which are typically 15%. Sometimes that is 15% of the amount you originally owed. Sometimes that is 15% of the amount you paid.

    The problem is debt settlement companies often dont make that clear to consumers. Either way, it amounts to big chunk of change. The average debt settlement customer has six debts totaling $30,000.

    If you settled that at 48 percent, youd pay $14,400. But the fee on the balance would still be $2,340, bringing your total payment to $16,740.

    Forgiven Mortgage Debt After Foreclosures

    This rule applies even to debts you owe after a foreclosure. In this situation, the law can seem especially cruel: Not only have you lost your property, but you might also have to pay income tax on the difference between what you originally owed the lender and what it was able to sell your property for if the deficiency is forgiven.

    To keep financially strapped homeowners from taking a second hit at tax time, Congress passed the Mortgage Forgiveness Debt Relief Act in 2007 and I.R.C. §108 was added to the Internal Revenue Code, creating the Qualified Principal Residence Indebtedness exclusion. Under this exclusion, some taxpayers don’t have to pay taxes for mortgage debt forgiven during 2007 through 2025, as well as debt discharged after that if a written agreement was entered into before January 1, 2026.

    The exclusion provides tax relief if your deficiency stems from the sale of your primary residence . Here are the basic rules:

    Loans for your primary residence. If the loan was secured by your primary residence and was used to build, buy, or improve that house, as of December 31, 2020, you may generally exclude up to $750,000 . Before this date, taxpayers could exclude $2 million of forgiven debt. So, if you qualify for the exclusion, you don’t have to pay tax on the deficiency. The exclusion also applies to refinances, but only up to the amount of the original mortgage principal before the refinance.

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