How will settling debt on my husband’s repossessed truck affect our taxes?
My husband is currently deployed and I now have a collection agency calling me seeking to pay off the debt in his name that is from a truck he totaled over a year ago and we couldn't afford to pay for. The total amount owed is $9,358. They are asking me if I will pay a settlement of $2,350 along with a 1099 form of course. My fear is, that the difference is going to cause us to owe more on our taxes.
What I would like to know is, since my husband is deployed, how will the difference affect our taxes? Are we exempt in any way to not have to put the difference down as income? I just don't want to go to pay our taxes and end up having to owe hundreds more because of a temporary financial settlement. Thank you for your time.
—Allie
Short answer
Whether you owe tax on the forgiven portion comes down to an assets against liabilities exercise. If what you owe adds up to more than what you own, you may owe no tax on the settlement at all.
Key points on this page
- The offer you described is a fair settlement and a significant saving, and you are in a position to fund it
- On one side of a page, add up the value of what you own: cars, equity in the home, savings, retirement accounts
- On the other side, list every debt and what you owe on it, including how far underwater the mortgage is if it is
- Compare the two totals, because owing more than you own is what can remove the tax on the forgiven amount
- Connect with a tax professional on this rather than guessing at it
- If you file your own taxes, the IRS resources on debt forgiveness cover how the calculation is done
That is a fair settlement and a significant savings. From what you shared, you are in a position to fund the offer. Answering the 1099c and tax implications of settling this debt is a fairly simple effort on your part.
Settling debt and taxes on the forgiven portion are a real concern.
You may, or may not owe tax on the amount you save in the settlement. How you calculate whether or not you owe the tax is an asset vs liability exercise. Take a piece of paper and on one side add up the value of what you own (cars, equity in home, amounts in savings, 401k etc.). On the other side list all of your debts and what you owe (credit card balances, if your mortgage is upside down – by how much – all debts).
If what you owe adds up to more than what you own, you may not owe tax on any settlements and the forgiven debt that results.
You should look to connect with a tax pro on this concern. Here is some additional light reading on the issue and some IRS resources on the topic if you do your own taxes: https://consumerrecoverynetwork.com/debt-forgiveness-taxes-settled-credit-card
About Michael BoveeMichael started CRN in 2004 with a mission to provide people in need with detailed debt and credit help and education. Michael has participated as an expert panelist in federal consumer protection rule making, collaborated on state law changes governing debt consolidation, has worked as an expert witness in court matters related to the debt relief industry. He is available to speak with you about your financial struggle and helps people resolve their debt problems daily.
Leave a Reply