Unwelcome tax surprises may await those with debt

[question everything]

Americans struggling with debt might get some additional unpleasant tax surprises this year: From needing to pay taxes on forgiven debt to seeing reduced deductions as a result of loans that are in forbearance, some taxpayers are poised to owe more than they might realize. Here are three ways debt can lead to tax surprises.

Owing taxes on forgiven debt. If you have had student loan or credit card debt forgiven, then that canceled debt is often included in taxable income during the year that it is forgiven, explains Richard Bolger, a bankruptcy attorney in Fairfax, Va. You are required to report all taxable income, including forgiven debt, to the IRS. To avoid surprises, Bolger suggests carefully reading the fine print that comes with the debt settlement offers, and to ask questions before agreeing to anything.

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Losing your refund to debt collectors. While collection agencies can't take your refund from the IRS directly, it's possible that they can take it once it's in your bank account if the account is at risk of garnishment because of a debt collection judgment, said Lauren Saunders, associate director at the National Consumer Law Center. If the account is garnished, she adds, many states have laws that protect part of the money. "But in most states, the consumer has to go to court to assert the protection and must act quickly," Saunders said.

Another option, she adds, is to request the refund by paper check instead of by direct deposit, or to immediately withdraw any funds needed. That can protect the money from being immediately seized by collection agencies.

E-mail: [e-mail]. Twitter: @kimberlypalmer.

https://www.startribune.com/unwelcome-tax-surprises-may-await-those-with-debt/600031092/

[Hugh_Lebowski]

1. The only thing different about this year is some people may've paid less tax-deductible interest

Due to some student loan and mortgage forbearance programs created during the COVID crisis.

And honestly, if you don't already know you can't deduct interest on loan payments on your taxes that you never actually made ... you are one dumb taxpayer.

The other things in the list are the same as they ever were.

[Indykatie]

2. Taxes on Cancelled Debt or Unemployment Benefits are Not New Rules n/t

[underpants]

3. I didn't know about the forgiven debt as taxable income

Great. I finally am about to qualify to apply for forgiveness of student debt.

[forgotmylogin]

4. Just be aware of it.

I got my debt settled and a large portion forgiven. I wasn't aware the first year in 2019 and the IRS sent me a bill for $600 I owed on it. I made sure the next year when the last card got cancelled that I accounted for it and paid up front.