How Debt Settlement Impacts Your Taxes
Debt settlement is an important tool for resolving debt issues, but it comes with certain tax implications that should be taken into consideration. It is important to note that debt settlement affects taxes both in the short and long term, so understanding how this process works can help you make informed decisions about your debt resolution strategy.
When a debtor settles their debt with a creditor, the amount of money forgiven by the creditor must be reported on the debtor's taxes as income, even though they never received any money directly from the creditor. This means they may owe additional taxes to the IRS or state government on this "phantom income." In addition, depending on the state where they live, they may also have to pay taxes on debts forgiven through settlements or modifications.
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