Author Topic: Payments for Debt Settlement Services are deductible  (Read 8579 times)

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Payments for Debt Settlement Services are deductible
« on: June 13, 2013 09:49:50 PM »
IRS recently ruled that under certain circumstances fees paid to companies that negotiate debt settlements can be tax deductible. The sole condition is that you be issued a 1099C for the settled amount. Here is the relevant part from IRS publications (no copyright, public document):

Question:  Adam paid $2,500 to a debt resolution company to reduce his credit card debt. The debt resolution company successfully reduced his debt and sent Adam a Form 1099-C, Cancellation of Debt, for $10,000. He reported the $10,000 as other income on Line 21 of Form 1040, U.S. Individual Income Tax Return. Can Adam deduct the $2,500 he paid to the debt resolution company?

Answer:  The fee is deductible because it was paid to produce taxable cancellation of debt income. Adam can deduct $2,500 on Schedule A as a miscellaneous itemized deduction, subject to the 2% of AGI limitation [Thomas Tran v. Commissioner, TC Summary Opinion 2012-110].

As an EA I would give the opinion that the upper limit of what can be deducted would be the amount of 1099C income. Whether the 1099C income can be excepted out under the Continued insolvency rules would be irrelevant.

« Last Edit: June 13, 2013 10:11:44 PM by Flyingifr »
BTW-the Flyingifr Method does work. (quoted from Hannah on Infinite Credit, September 19, 2006)

I think of a telephone as a Debt Collector's crowbar. With such a device it is possible to pry one's mouth open wide enough to allow the insertion of a foot or two.

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