Using Mortgage and HELOC Debt to Offset Taxes After Settling Credit Cards For Less – Charles
1. Just closed a clothing business after 5 years.
2. Have absorbed $150K of personal debt in the process of trying to save the business (includes $90K in credit card debt as well as $60K in home equity line of credit against our personal residence).
3. Two banks have settled on half the credit card debt ($45K) for a total of $14,500. We hope to settle the others at the same debt forgiveness rate.
4. We realize we will receive 1099’s for all settlements (about $30.5K so far).
5. All the transactions relating to the home equity line of credit, credit cards, monthly payments toward them while the store was open, etc. are clearly recorded on Quickbooks so it is clear that these debts, while personal, were dedicated to the operation of the store.
Question: Is there any way to write-off the debt forgiveness (i.e. the 1099 income) against the $60K in home equity debt or the $90K in credit card debt accrued through the store? In other words, when we submit our 1040 return, can we avoid paying taxes or reduce the amount we will need to pay on the 1099 income?
Yes, you absolutely can offset taxes from forgiven debt when you settle credit cards for less than what you owe – including using the home equity debt. While you are in the process of settling credit card debts it is a good idea to know where your tax liability may be after each account is settled, as your ability to apply the insolvency rule changes with each debt settled.
Here is a report about the tax implications from settling credit card debt: https://consumerrecoverynetwork.com/debt-forgiveness-taxes-settled-credit-card
The report provides IRS resources for calculating whether you will owe income on any portion of the debts forgiven.
Keep track of savings from settlement and you assets vs liabilities.
List all of your assets such as retirement accounts, home equity, KBB value of vehicles etc.
List all of your liabilities such as credit card debts, mortgage debt, amounts owed on auto loans, student debts etc.
Subtract your total debt from your total assets. Are you in the red or black? If you are in the positive you will likely owe tax on the forgiven debt. If you are in the red – by how much? Each time you settle a debt the calculations on the liability side will change. You should adjust and track this as you continue settling your credit cards.
Due to the home value deterioration from the popped housing bubble, those settling credit card debt have been able to offset taxes owed, or even eliminate any taxes owed, depending on how underwater they are on their homes loan to value. If you equity in your home you may not be able to turn this situation in to lemonade though.
You can utilize the resources provided in the linked report above if you file your own taxes. If you use a tax pro, even if only for the years you are settling debt, be sure to connect with one who is already familiar using IRS form 982. While the insolvency rule related to settling debt is becoming more widely known in the tax professional community since the onset of the recession, I still hear of instances where a pro is unfamiliar having never applied the rule in practice.
What are the remaining credit card debts and balances you have to settle? Are you still dealing with your original creditors, or have the accounts been charged off and dumped into the collection pipeline?