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.
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