Court Radio: A Tax Expert Explains How Debt Reduction Programs Can Affect Your 2011 Tax Returns, Listen In at 7 a.m. Sunday to Court Radio
By Dean I Weitzman, Esq. on March 16th, 2012
Have you been laid off from a job for an extended time? Have mortgage companies, banks or credit card companies forgiven part of what you owe them? If so, here’s what you need to know about how such debt forgiveness programs can affect your tax returns. That forgiven debt could be viewed as income and you might owe taxes on it.
You’ve surely seen all those ads on television and in newspapers about “debt reduction” programs that can help struggling families reduce their debt due to job lay-offs and other life situations.
But did you know that U.S. tax laws could require you to pay taxes on any debt amounts that are “forgiven” or reduced by lenders, since that debt forgiveness could be seen as income?
Well, don’t panic, but do listen in to “Court Radio” this Sunday morning at 7 a.m. when the topic of debt forgiveness will be dissected by special guest Waverley Madden, an attorney with Philadelphia’s Madden Law Firm as she joins the host of Court Radio, MyPhillyLawyer managing partner Dean Weitzman and his co-host and fellow attorney, David Rapoport.
Court Radio is broadcast live every Sunday morning on Philadelphia’s WRNB 100.3 FM, with a simulcast on Magic 95.9 FM in Baltimore. You can also listen live on the Internet at WRNB 100.3 or on Magic 95.9 via streaming audio.
For taxpayers who receive debt forgiveness, this is an issue you will need to discuss with your tax attorney or other tax professional to be sure that your tax returns accurately reflect any extra tax liability you may incur, Madden said in an interview.
“It’s always been the case,” she said of possible tax liability after debt forgiveness. “It’s always been treated as income and it’s potentially taxable.”
During the radio show, Madden will talk about various rules and regulations affecting tax returns when taxpayers receive debt forgiveness, including forgiveness amounts that can trigger a tax liability.
Often debt forgiveness occurs when a creditor knows that people own money but don’t have adequate income due to job lay-offs or other factors, she said. “They know that they can’t squeeze blood from a stone so they’ll instead take fifty cents on the dollar and get something out of the money that is owed to them,” Madden said. The debt is essentially “written off” as uncollectable by the lender. “Maybe that person hasn’t worked in three years.”
For some taxpayers, though, the shock can come later because they didn’t realize that the debt forgiveness might have reduced what they owed, but it might have at the same time unexpectedly increased their tax liability to the government because the amount of reduction is seen as income.
“Even if they forgive part of the debt, you still can be on the hook for taxes perhaps,” she said. There are exceptions in the tax law, of course, and that’s where talking with your tax attorney or tax professional comes in, she said. Madden will address many of the possible exceptions during the Court Radio broadcast. “And even if you are still on the hook for potential tax liability, there may be a way around it. That’s why we have tax deductions.”
Madden received her law degree from Howard University School of Law and a bachelor’s degree in social work from McGill University. She also received a bachelor’s degree in languages and literature with a minor in international studies from Vanier College. She specializes in family, immigration and bankruptcy law.
Be sure to listen in to Court Radio at 7 a.m. Sunday to hear the whole discussion and get additional important tips from Madden and co-hosts Dean Weitzman and David Rapoport. And remember to call in with your own questions and comments on this pertinent topic, especially as the April 16th tax return deadline approaches.
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