Will I Have to Pay Taxes on a Debt in Collections That I Pay Off?

by Dan
(California)

I've heard that I will have to pay taxes on the difference of my settled debt. Does this also apply when the debt is sold to a collection agency and then paid off?

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Sep 13, 2011
 Will I Have to Pay Taxes on a Debt in Collections That I Pay Off?
by: Debtcollectionanswers.com.

When you settle a debt, the IRS treats the amount of money that you save as income and if it's over $600, you will have to claim it on your federal taxes. As a result of this additional income, it's possible that you will have to pay more in taxes on April 15th than you would have otherwise. However, if the total amount of your debts exceeds the total value of your income, you can ask the IRS to cancel the tax liability resulting from the settlement by filing IRS Form 982.

As for whether paying the amount of debt that is in collections will implications for your taxes, the answer is no.

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