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7 Things Debtors Need to Know About Tax Season

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We’re inching closer to April 15th, 2018, also known as the tax-filing deadline in the U.S.

Per Debt.org, over $114 billion in taxes goes unpaid each year. This number comprises 17 percent of all federal taxes and involves approximately 10 million people.

Some of these individuals are simply being negligible, but others don’t have enough liquidity to pay their taxes come year end—especially if they had a difficult financial year.

To ensure you don’t end up in a similar situation, here are seven things you should know about tax season.

April 15th Is Last Day to File Taxes or Submit a Tax-Filing Extension.

Many people, debtors or not, push it close when it comes to filing their 2018 taxes. Whether it’s a jam-packed schedule keeping somebody from doing it or not enough funds to make an expected tax payment, it’s important to know that April 15th isn’t the deadline to pay your taxes.

If you can’t file your taxes by April 15th or pay the expected tax for the year, you can use the IRS’ Free File to get a six-month extension and avoid costly penalties. Other options available include long-term payment plans if you owe less than $5,000, delaying payment if you can’t afford basic living expenses, or compromising on a lower amount.

The 1099-C Form

COD income, or “cancellation of debt” income applies to forgiven debts that exceed $600 in the taxable year. Like anything in the tax world, exemptions exist. Debtors who have had debts canceled due to personal bankruptcy, insolvency, student loan forgiveness, or if debt was cancelled truly by means of a gift (e.g. family members and friends) may not be required to pay forgiveness tax. Debt settlement doesn’t typically fall under the list of exclusions. However, it’s worth asking your tax professionals as some Freedom Debt Relief reviews describe optimistic outcomes when it comes to paying forgiveness tax. Additionally, this list of exemptions and scenarios is also worth reviewing.

Offers in Compromise

The IRS doesn’t always get the credit it deserves when it comes to being forgiving, but they accepted over 40 percent of offers in compromise letters in 2017, equating to nearly $256 million.

But to be among this 40 percent, one of the following needs to be true:

  • The IRS may have incorrectly determined your tax amount.
  • It’s doubtful you can pay your debt based on your financial situation.
  • Paying the debt would cause economic hardship.

The IRS will look at your ability to pay, your income, your assets and your expenses to determine if you can pay, and if so, how much.

Student Loan Tax Breaks

Most people with a student loan debt probably aren’t thrilled with their overall balance. Student loan interest rates are low, but their high balances typically cause them to stick around for a while. However, student loans can be quite tax-friendly.

Form 1098-E allows debtors to deduct up to $2,500 of taxable income if their modified gross income is less than $65,000 (filing single), and $130,000 (filing jointly). You can deduct a reduced amount for income up to $80,000 (filing single) and $160,000 (filing jointly).

Former students working for a non-profit or branch of the government can also take advantage of the Public Service Loan Forgiveness Program if they’ve made 120 payments on-time consecutively. This is a great benefit because the forgiven amount isn’t taxed. The other option is to choose a repayment plan based on income. However, it’s important to note that debtors are taxed on the overall balance when their repayment plan ends.

Tax Benefits for Children

Dealing with debt is hard enough without the added responsibility of supporting a family. However, there is a silver lining in these situations. Per the GOP 2018 tax reform, tax filers now receive $2,000 (up from $1,000) per child as long as they’re under 17 at the end of the tax year.

Other changes include more of the tax credit being refundable (up to $1,400), and the adjusted gross income thresholds for full credit increasing to $200,000 for single filers (up from 75,000) and $400,000 for married couples filing jointly (up from $110,000).

Did You Experience a Federal Disaster?

No matter what your fiscal situation is in, if you experienced a natural disaster, the IRS extends several tax benefits, including tax-filing extensions, tax breaks through casualty loss, accelerated tax refunds, and more.

FEMA lists more than 100 disasters nationwide in 2018 — does yours qualify? It’s also important to note that victims of natural disasters occurring in 2019 (i.e. the Alabama tornadoes) may still be eligible for certain types of assistance.

Mortgage Tax Breaks

Tax breaks for buying a home aren’t what they used to be, but recent homeowners may still be eligible for a tax deduction on loan interest paid (qualified home equity, HELOC, mortgages) of up to $750,000. However, HELOCs and home equity loans only apply if the loan was spent on home-improvement. To receive the tax break, debtors must file a form 1040 and itemize their deductions.

If you’re doing your taxes this year and dealt with, or are dealing, with debt, it’s worth researching every deduction and credit available. Use this article as a springboard to dig further into tax-saving options. If still in doubt, turn to a licensed tax professional for advice on your situation.

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