How much tax do you owe on forgiven debt?
Forgiven debt is counted as taxable income, which can push you into a much higher tax bracket and trigger a massive tax bill. This uncertainty stops people from negotiating their balances down, as they fear trading their credit card debt for an unpayable IRS balance that puts them in a worse situation.
What people tried
Every workaround mentioned in the threads below. We haven’t tested any of them — and nobody here is claiming they worked.
Found another way around this?
Share your steps and trade-offs so fellow engineers don't have to reinvent the wheel. No account required.
- 1calling the creditor to negotiate a settlementDid this help you?
- 2calculating expected income minus deductions and applying bracket percentages to the forgiven amountDid this help you?
- 3setting up payment plans with the IRSDid this help you?
- 4Setting up a long-term installment agreement with the IRS.Did this help you?
- 5Saving aggressively in a high-yield account in the years leading up to forgiveness.Did this help you?
- 6Taking out a home equity loan or 401(k) loan to cover the tax bill.Did this help you?
- 7Exploring legal insolvency to reduce the tax burden.Did this help you?
- 8Requesting loan forbearance to delay the tax event and save more cash.Did this help you?
In their words
Unedited, grouped by where they were said, most upvoted first within each place, each linked to the thread it came from.
“Unfortunately, as of the first of this year, the forgiven amount is now taxable. At discharge the loan amount will be $375,000 which will result in a $115-120k tax bill.”source ↗
“I will have a 60-70k tax bill when the time comes for me. My plan is to take a 401k loan or home equity loan. I think I’ll get a lower interest rate than what the IRS charges. I may try to have more taxes taken out of my paychecks but there’s no way I’ll be able to afford 60k more that year.”source ↗
“I have used a calculator and it showed I would be paying 52-60k based on my forgiven loan amount and my expected income for the year it will be forgiven. It puts me with an income in the 400k range that year…that’s the 35% tax bracket. If only I could quit working that year.”source ↗
“Based on those numbers is there any way to speculate how much I could potentially owe, and are those amounts usually on a time limit? That was another thing I’ve worried about.”source ↗
“I have the same amount of debt and through Capital One, but my question is what does this look like when tax season comes around?”source ↗
“I’m just trying to figure out what that would look like before I call and make an attempt at lowering my debt.”source ↗
“I don’t want to end up having tax season roll around and I owe a huge amount I can’t pay then and be in a harsher situation.”source ↗
Where this came up
People with this problem also raised
- 4Do tax write-offs mean you get free stuff or money back?
- 3How did my accountant get my taxes so low?
- 2How to handle an unexpected tax bill or IRS penalty
- 2Medical debt too high for low-income help
- 3How to minimize taxes on a large pre-tax retirement account and RMDs
- 3Can I get a loan with unfiled tax returns?