What if I can't pay my taxes? by Barbara Joyce
In may not be as horrible as you think. If you can't pay the full amount of you owe by the April deadline, you should still file your return and pay as much as you can to avoid penalties and interest. You may be eligible for some relief such as: short-term extension to pay, an installment agreement, or an offer in compromise. The IRS may even waive some of the penalties (but not interest). What if I have debt that is forgiven? The tax impact of forgiveness or cancellation depends on your individual circumstances. Generally, if you borrow money from a commercial lender and the lender later cancels or forgive the debt, you may have to include the cancelled amount in income for tax purposes. Yes, it may be considered taxable income! The lender may be required to issue you a Form 1099-C, Cancellation of Debt. Two of several exceptions to the taxability of cancelled debt are insolvency and bankruptcy. What if I am insolvent? You are insolvent if your total liabilities are more than your total assets. The forgiven debt may be excluded as income under the "insolvency" exclusion. Generally, you are not required to include forgiven debts in income to the extent that your are insolvent. What if I file for bankruptcy protection? Debts discharged through bankruptcy are not considered taxable income. If you are an individual debtor who files for bankruptcy under Chapter 7 or 11, a separate "estate" is created consisting of the property that belonged to you before the filing date. This estate is a new taxable entity, completely separate from you as an individual taxpayer. Please note, some debts are not dischargeable in bankruptcy action. What if I lose my home through foreclosure? Under the Mortgage Forgiveness Debt Relief Act of 2007, you can usually exclude income from the discharge of debt on your principal residence or mortgage restructuring. This exception does not apply to second homes or vacation homes. What if I sell my home for a loss? Losses from the sales of your home are not tax deductible. It is also not eligible for the capital gains loss of up to $3,000 annually. |