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Anne
Anne, Master Tax Preparer
Category: Tax
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Experience:  Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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This is a tax question. Why does tax law view the forgiveness

Resolved Question:

This is a tax question.

Why does tax law view the forgiveness of debt as taxable income?

I think one reason is to avoid fraudulent schemes to defraud the IRS. Any other thoughts?
Please provide support.
Submitted: 3 years ago.
Category: Tax
Expert:  Anne replied 3 years ago.

Anne :

Hi

Anne :

Thank you for using justanswer.

Anne :

This is a hard concept for alot of people , and I admit it took me a little bit of time to wrap my brain around it

Anne :

Lets start with an easy example first

Anne :

Lets imagine that you purchased a big ticket item.....a large screen tv, etc

Anne :

and let's say that you paid by cc

Anne :

the company you purchased the tv from has been paid in full by your cc

Anne :

and lets also say that 3 months later, before you finish paying off the balance you lose your job

Anne :

now you can no longer pay your cc

Anne :

you still own the tv, which according to the company you purchased it from, is paid in full

Anne :

Lets also say that the tv was $1000,

Anne :

and you managed to pay off $300 of that debt to your cc company before you lost your job.

Anne :

so eventually, you receive a forgiveness of debt in the amount of $700

Anne :

that $700 NEVER came out of your pocket

Anne :

Part of the reason for the cc company to issue the cancellation of debt is for their book keeping purposes

Anne :

the other part is, as I stated before, the fact that you never actually paid the $700, meaning for all intents and purposes your cc company is left "holding the bag"

Anne :

So, you received the benefit of not having to pay the $700

Anne :

If you can't pay a debt in full, there are ALWAYS consequences that must be dealt with.

Anne :

From taking a hit on your credit report, to paying pennies on the dollar under a cancellation of debt

Anne :

Here is a pretty good website:

Anne :

http://online.wsj.com/article/SB10001424127887324582804578344323133620846.html

Anne :

 


I truly hope this information is helpful but please do not rate until you are satisfied. If you want to click on 1 or 2 just click on the continue to work with me button instead. You will then be able to add any other info or respond to what I have posted so far. Rating 3-5 gives me credit and a good rating but you can still converse with me.

Customer: replied 3 years ago.

You are welcome.

 

Customer: replied 3 years ago.
ok
Customer: replied 3 years ago.
Thanks for the above information. However, I already knew that. My question is why does tax law view the forgiveness of debt as taxable income?
Expert:  Anne replied 3 years ago.

because you got the benefit of not paying the bill in full, and the IRS considerers that benefit to be taxable, just as some employers consider the portion of health insurance they pay on your behalf to be a taxable benefit, and they include that in box 1 of your W2

 

 

I truly hope this information is helpful but please do not rate until you are satisfied. If you want to click on 1 or 2 just click on the continue to work with me button instead. You will then be able to add any other info or respond to what I have posted so far. Rating 3-5 gives me credit and a good rating but you can still converse with me.

Anne and other Tax Specialists are ready to help you
Expert:  Anne replied 3 years ago.
Thank you fo the accept.

Please feel free to ask for me by name if I can help you in the future