Tax Tips

Credit card settlements
People with large credit card debt sometimes are able to settle for less than the full amount owed. If someone owes $25,000 and settles the debt in full for, say $8,000, the $17,000 difference is taxable income.

Loophole: This income is not recognized for tax purposes if the debt relief is part of a personal bankruptcy settlement or if the debtor is insolvent immediately before the debt cancellation.

Even in those situations, the lender will send a Form 1099-C, Cancellation of Debt, to the IRS reporting the cancellation of debt as income. To avoid tax, you must complete and attach Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, to your tax return.

Long-term-disability insurance payments
Some employees who become disabled receive payment under an employer-provided disability policy.

These policies are often included in compensation packages as a tax-free fringe benefit. Other companies have cafeteria plans offering an array of benefits, including disability insurance, that employees must choose from. The tax treatment of these benefits depends entirely on who paid the premiums…

If the employer paid, benefits are taxable.

If the employee paid, benefits are tax free.