When a person borrows money and later cannot repay the loan, the lender may decide to forgive the debt. In most cases, the borrower is required to report the discharged debt as income, but there are some exceptions. Read further to learn more about income reporting requirements for debt relief in St. Charles, MO.
When are Discharged Debts not Considered Income?
There are some situations in which discharged debts are not considered income, such as:
* when it is discharged under bankruptcy law;
* when the taxpayer is insolvent; and
* when the debt is a certain type of farm indebtedness.
What is Insolvency?
For this rule’s purposes, taxpayers are considered insolvent if their debt liabilities exceed the market value of their assets. If the discharged debt is over the insolvency standard, the taxpayer must recognize the difference as income.
Are Discharged Student Loans Excluded from Income Requirements?
In some cases, they can be, but the exemption only applies to some student loans. There’s a strict rule that applies to student loans, and taxpayers may be able to exclude some or all of their student loan discharge if:
* the agreement stipulates that the loan can be discharged, or if
* the borrower spends a specific amount of time in a certain profession in return for the discharge.
Only loans from local, state or federal government entities can be excluded, as can loans from some public benefits corporations and educational institutions.
Exceptions to the Exclusion Rules
There are some exceptions to the general rules of debt relief in St. Charles, MO, and the two most notable exceptions are listed below.
* The borrower cannot have income that would have been deducted if the debt had been paid.
* The buyer can treat the discharged debt as a price adjustment when they buy something on credit.
Do Debtors Need a Lawyer’s Help with Tax Issues?
Today’s tax laws are ever-changing and complex. Although there are tax prep software bundles available, no program can provide the same type of service available from a tax attorney. If a person is unsure how their losses should be characterized, or if they need legal representation before the Internal Revenue Service, they should click here to speak to a tax attorney with the Law Offices of Steven K. Brown.