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Did you borrow money?Then you may be due to some unwelcome tax surprises

(((NerdWallet) — Debt-stricken Americans may get some more offensive tax surprises this year.

From having to pay taxes on allowed debt to seeing a reduction in deductions as a result of a tolerant loan, some taxpayers say they are in addition to the already confused tax year. Ready to borrow more than you understand. Some taxpayers also run the risk of losing refunds to debt collectors.

According to it is no wonder Nerd Wallet 2021 Tax Report, One-third of filers are stressed and anxious about this year’s payments.

The· Pandemic It can disrupt the lives of many people and directly or indirectly affect taxes. However, there are steps you can take to mitigate the impact and prevent the tax season from having another catastrophic impact on your finances.

Here are three ways (and how to deal with them) debt can lead to tax surprises:

Payment of taxes on allowed debt

If you have a student loan or credit card Borrowed debtRichard Bolger, a bankruptcy lawyer and host of bankruptcy podcasts based in Fairfax, Virginia, explains that the canceled debt is often included in the taxable income of the year allowed. All taxable income, including tax exemption obligations, must be reported to the IRS. You may also receive a 1099-C form by mail with your taxable income.

To avoid surprises, Bolger is advised to carefully read the fine print that accompanies the debt settlement offer, often explain the tax implications, and ask questions before agreeing to anything. If you’re still unsure, a bankruptcy lawyer can help, he says.

Stephen Fishman, a tax lawyer and writer based in Olympia, Washington, said the best way to prepare for tax bills arising from debt allowed is to pre-pay money ready to pay by April 15. I say it’s a matter of saving.

“If you can’t afford to pay taxes, you can plan your payments at the IRS,” he adds.The· Amount you owe The higher your tax rate, the more you will borrow, as it depends on your tax rate.

Reducing loan deductions during the grace period

With COVID-19 Relief Program CARES methodMany Americans took advantage of student and mortgage grace programs in 2020. That is, they temporarily suspended mortgage payments. Interest is usually accrued during this period, but consumers do not pay it. And if you haven’t paid deductible interest, that means you can’t receive it as a tax deduction, which can increase your tax amount.

“The tax amount is probably higher in the tax year when the deductible interest was not paid, and all other conditions are the same,” says Bolger. However, many Americans chose a tolerance program because they lost their jobs and other income. Therefore, the overall tax amount may be lower.

Fishman also points out that when it comes to mortgages, many taxpayers don’t itemize deductions and instead choose standard deductions, so they can’t deduct anyway. (However, taxpayers can get interest deductions for student loans without specifying any items.) Therefore, you will lose these deductions unless you choose a tolerance program with the same (or increased) income. The overall impact of may be negligible.

Lose the refund to the debt collector

If there is a risk that the account will be debited due to a debt collection decision, the collection agency will not be able to receive a refund directly from the IRS, but may be able to do so once it enters the bank account, said Lauren Sanders Associate Director. I will. National Consumer Law Center.

If the account is garnished, she adds, many states have laws that protect some of the money. “But in most states, consumers have to go to court to claim protection and act swiftly,” says Saunders.

Another option is to request a refund with a paper check instead of a direct deposit, or withdraw the required funds immediately. It can prevent money from being immediately seized by a collection agency.

It’s also worth noting what the federal government can do Refrain from tax refund Depending on the situation, such as when you have to pay late taxes or child support.Over the past few years, the IRS has also been able to withhold unpaid federal student loans (although these collection activities have Pause until the end of September Because of the pandemic).

As about 50% of filers expect, if you receive a tax refund, you can repay part of your debt and reduce your future debt burden. According to a NerdWallet report, 32% of filers hoping for a refund say they will spend money to repay their debt.

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Kimberly Palmer is writing for Nerd Wallet. Email: Twitter: @kimberlypalmer.

An article originally published in Nerd Wallet that unwelcome tax surprises may await people in debt.

Did you borrow money?Then you may be due to some unwelcome tax surprises

Source link Did you borrow money?Then you may be due to some unwelcome tax surprises

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