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Old 07-19-2015, 12:56 AM
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Debt settlement and taxes

I am a US citizen living abroad. As such, I am exempt from paying US taxes, as long as my income does not exceed $85K or so, though I still have to file each year. This year (2015) I have the chance to settle a long standing debt. The total debt is about $30K. The company is willing to settle for about $8K It originally was credit card debt - the debt was accrued partly in the US and partly abroad, by a US bank. As I understand it, the $22K that I will not have to pay will be considered income. When filing for 2015, I will still be considered an "expat" and will be able to file as I have in the past.

My question: how will this affect my "filing status" this (2015) tax year? Is this $22K considered income earned in the US or will I be able to add it to the income earned overseas since I have lived the required number of days abroad? Will I still be able to file as I have in the past, but add the $22K to my income? Or do I have to file as two sets of taxes? My income for this year will be about $50K, so even adding the $22K to it will keep me below the radar ($85K).


Last edited by pengyou : 07-19-2015 at 12:58 AM.


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Old 07-19-2015, 12:07 PM
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Originally Posted by pengyou View Post
I am a US citizen living abroad. As such, I am exempt from paying US taxes, as long as my income does not exceed $85K or so, though I still have to file each year. This year (2015) I have the chance to settle a long standing debt. The total debt is about $30K. The company is willing to settle for about $8K It originally was credit card debt - the debt was accrued partly in the US and partly abroad, by a US bank. As I understand it, the $22K that I will not have to pay will be considered income. When filing for 2015, I will still be considered an "expat" and will be able to file as I have in the past.

My question: how will this affect my "filing status" this (2015) tax year? Is this $22K considered income earned in the US or will I be able to add it to the income earned overseas since I have lived the required number of days abroad? Will I still be able to file as I have in the past, but add the $22K to my income? Or do I have to file as two sets of taxes? My income for this year will be about $50K, so even adding the $22K to it will keep me below the radar ($85K).
As I understand it, the $22K that I will not have to pay will be considered income.=======>>In general yes; you are generally required to count that forgiven amount as income on your tax return UNLESSS the Debt was discharged in bankruptcy/the Debt was canceled when you were insolvent; the cancellation of debt was a gift.



When filing for 2015, I will still be considered an "expat" and will be able to file as I have in the past.===>>I think so.

My question: how will this affect my "filing status" this (2015) tax year? Is this $22K considered income earned in the US or will I be able to add it to the income earned overseas since I have lived the required number of days abroad? ====>As said, you need to report it on your 1040 line 21, NOT on your foreign tax return. your lender is required to provide you with a Form 1099-C, showing the canceled debt and any interest that was forgiven. A copy of the 1099-C will be sent to the IRS,too so the debts must be reported unless they qualify as an exclusion. You need to enter the amount on line 21 of the Form 1040 as other income as it was your personal debt.


Will I still be able to file as I have in the past, but add the $22K to my income? Or do I have to file as two sets of taxes? My income for this year will be about $50K, so even adding the $22K to it will keep me below the radar ($85K).=========>>As mentioned above; you must attach Form 2555 to your Form 1040. The foreign earned income exclusion applies only to income arising from performing services either as an employee or as an independent contractor. "The term 'earned income' means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered. your foreign earned income exclusion does not exclude income from Social Security or Medicare taxes. Your federal income tax on 1040 is calculated by first calculating the amount of income tax on income without taking the foreign earned income exclusion into account, and then subtracting the tax as calculated on the amount of foreign earned income that is excluded. The result is the amount of the federal income tax liability.



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Old 07-19-2015, 04:27 PM
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So, if I understand you correctly, in US taxes, I will have to pay no tax on income earned abroad - because I am under the $85K rule - but will have to pay US taxes on the $22K?



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Old 07-19-2015, 04:33 PM
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So, will I have to pay US taxes on the $22,000 for 2015? and would I have to pay social security taxes on it? I have read somewhere that there is a "means" rule, that says if the forgiven debt is less than my net worth, I can also be excluded from paying taxes. Is that true?



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Old 07-19-2015, 08:08 PM
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Originally Posted by pengyou View Post
So, will I have to pay US taxes on the $22,000 for 2015? and would I have to pay social security taxes on it? I have read somewhere that there is a "means" rule, that says if the forgiven debt is less than my net worth, I can also be excluded from paying taxes. Is that true?
So, will I have to pay US taxes on the $22,000 for 2015? =====>>As you can see, it depends; aslongas your US taxes exceed your FEIE on f2555, then yes you need to pay the difference to IRS(when your US tax liability > your FEIE); the rules for filing U.S. income tax returns and paying estimated taxes(if you file Sch C/SE on your return in US) are the same whether you are in the US or abroad. You need to pay US taxes on income you earned overseas in the same way you pay taxes on income you earned in the US. In other words,FICA taxes may apply to WAGES you earned for services in a foreign country aslongas you are working for a U.S. employer; You are working for a foreign affiliate of a U.S. employer under a voluntary agreement that was entered between the U.S. employer and the U.S. Treasury Department; you were working in one of the countries with which the U.S. has entered into a bilateral Social Security agreement. So UNLESS you meet any of the exceptions above, FICA taxes will not be withheld from your foreign wages. Aslongas your FEIEC exceeds $100,800 in 2015, I guess you can even claim foreign tax credit ( foreign tax deduction)on your US return either on 1040 or SCh A of 1040.

and would I have to pay social security taxes on it?=======>As mentioned above; you do not pay social taxes (or self employment taqxes as a self employer filing Sch C/SE) on the other income reported on 1040 line 21; fica taxes are imposed only on your earned income, i.e. wages, salaries, commissions or etc.

note; you may have to pay quarterly estimated taxes if you are working abroad for a foreign employer, since foreign employers generally don't withhold U.S. taxes from your wages. In general, your estimated tax is the total of your estimated income tax and self-employment for the year minus your expected withholding for the year. Don't include the income you expect to exclude when you estimate your gross income. In order to figure out your estimated tax liability, you can subtract your estimated housing deduction from your income. However, you may be subject to a penalty on the underpayment if the actual deduction or exclusion is less than you expected. In general, many TPs do not pay quarterly estimated taxes (UNLESS they have huge tax liaiblities)to IRS due to lower amount of penalties and interest that they need to pay to IRS.

I have read somewhere that there is a "means" rule, that says if the forgiven debt is less than my net worth, I can also be excluded from paying taxes. Is that true?====>>Not quite sure , so, you mean, if your forgiven debt is less than your net worth, then, you can also be excluded from paying taxes on the forgiven debt??? No I do not think so. please read my first comment;as said previously, If you filed for bankruptcy protection, you do not need to report the canceled debt as income , so no need to pay tax on it; ALSO, your forgiven debts canceled when you were insolvent. This is the most sweeping exception, because debt is generally only canceled when debtors are "insolvent" -, IRS-speak for being broke. Take note, however, the exclusion applies only up to the amount by which you are insolvent. Say, you owed $27K in credit card debt, which you settled by paying $5K. you received a Form 1099-C showing canceled debt income of $22K ($27K minus $5K). You had no other debts. Your assets at the time were worth $10K. Canceled debt: $22K; Total assets: $10K; Insolvency amount: $12K . You report $12K ($22Kminus the $10K insolvency amount) as income on your tax return.



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