Debt Consolidation May Mean An Increase on Your Taxes

Filed in archive Debt Consolidation on March 13, 2010

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While it is easy to find a cause for relief when you are able to consolidate debt, it may be a little short lived when you discover that taxes may need to be paid on that amount. The IRS really likes to see people get an income so they can get their share.

When your debt relief program means that more than a certain amount of debt is forgiven, then this is considered to be income by the IRS. Steve Bucci at Finance.yahoo.com says "The amount of debt that is forgiven is not forgotten. IRS rules state that if more than $600 is knocked off your bill (you'd be fiscally insane to go through all this for less), a 1099 is issued and you have to recognize the settled portion of the debt as income ... and pay taxes on it!"

It is also quite possible that you may not receive a 1099 for the amount of your debt forgiveness. Unfortunately, this does not mean you do not need to report it. Most likely, the IRS already knows. Keeping accurate records of all your debt consolidation deals are very important - just in case you get audited, or have a problem with your 1040 taxes.