As with most anything, there is no free ride, and creditors have to report canceled debts to the IRS on Form 1099 (when the canceled balance is $600 or greater). As a result, the chance exists that you may owe taxes on the excused portion of the debt. For this reason, a lot of financial writers and debt counselors are strongly critical of debt settlement, to the point where they actually recommend against it just because you may end up paying taxes. Although the tax consequences of settling your debts are highly over-eggagerated, and this is a really just a minor issue at best.

First off, even if you end up owing taxes on the canceled balances, that is because you saved a lot of money off your inital debts. The total of what you paid the creditor, plus the taxes, will still be much momumentally less than what you owed to begin with. There is still a net savings. So it is problematic to understand why this is taken as a problem in the first place!

Second, the big majority of people who settle their debts are not required to pay taxes on the pardoned portion of the balance. That’s due to of the “insolvency” rule, described in IRS Publication 908, “Bankruptcy Tax Guide.” Do not let the title fool you. You do not need to have already filed a formal declaration of bankruptcy to take use of the insolvency rule.

Basically, “insolvent” means that you have a negative net worth — that’s, you “owe” more than you “own.” As a consequence, many debtors don’t have a tax liability on the canceled debts, clearly due to most debtors are insolvent! It for the most part comes down on home equity. If you have sufficient equity in a home (or other property) to override the total of your liabilities (debts), then you have a positive net worth, and will likely have to pay taxes on the forgiven debt amounts.

When it comes to tax time, be sure to get professional tax advice specific to your situation. Also, make sure to read the section in IRS Publication 908 on “reduction of tax attributes,” which requires people using the insolvency rule to lower their basis in such things as rental property, loss carryovers, etc. Most of that probably won’t apply to you, but again, get specific advice before winging it.

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If you spent money on preventing an illness, treating an illness or coping with the effects of an illness or handicap, then the Internal Revenue Service allows you to write these expenses off of your taxes. Some examples of tax deductible medical expenses include an annual doctor’s checkup and a CT or MRI scan that has been ordered by a doctor. Needed dental work is also tax deductible. Chiropractor visits are also deductible if you have been diagnosed with a back problem.
If you or one of your dependants are physically handicapped, then you may deduct funds that are spent towards care and any items that are needed to accomodate the handicap. Home adjustments such as wheelchair ramps are deductible. The purchase of a wheelchair van can also be deducted from your taxes. Other related costs that are tax deductible include hearing aids, specialized telephones for the hearing impaired, the purchase and training of a Seeing Eye dog, eyeglasses and prosthetic limbs.

Expenses related to mental health care are also tax deductible. If you attend Alcoholics Anonymous meetings, you can deduct travel expenses to and from the meeting. If your child has a mental handicap, then special items acquired for his/her care and well being can also be deductible.

There are a number of medical expenses that are not tax deductible. Cosmetic surgery and procedures aren’t tax deductible. Some examples of such procedures include removing non-cancerous moles, having your teeth whitened, getting hair implants, liposuction, etc. If you got braces and did not absolutely need them, then you cannot deduct these from your taxes. Medical expenses of any sort are not tax deductible until you have paid the money and the procedure has been completed. Paying in advance for an upcoming medical expense will not allow you to take a tax deduction on the expense, as the work would need to be done before you can take a deduction. While going to the gym and taking vitamins can help to prevent illness, these costs cannot be deducted from your taxes.

Filing taxes is not an easy job. If you are not very careful, you could miss deductions that would enable you to save a great deal of money. If you, your spouse or one or more dependant children have had medical treatment to prevent a sickness, cure a sickness or deal with the effects of a sickness or handicap, then you can deduct these expenses from your taxes.

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Any money spent on the prevention or treatment of an illness are tax deductible. Money spent on dealing with a physical disability or illness is also deductible. If, for instance, you had an annual doctor’s checkup, an MRI scan or CT scan, then you may deduct these expenses from your taxes. You can also deduct any necessary dental work. Chiropractor visits can also be deducted from your income taxes, so long as the chiropractor you are seeing is licensed in your state.
If you are physically disabled or have a dependant who is physically disabled, then you can claim tax deductions on funds spent for care and rehabilitation. If your house must be remodeled to deal with the disability, then you can take a tax deduction for this. If you have to buy a wheelchair van, then this cost is also deductible. Special phones for the hearing impaired, the purchase of a seeing eye dog, eyeglasses, hearing aids and even prosthetic limbs are all tax deductible expenses.

You may also claim deductions if you or a dependant has an addiction or mental health problem. Alcoholics Anonymous club meetings are deductible. If a child or spouse is mentally impaired in any way, then costs relating to treatment and therapy are deductible.

While there are numerous medical costs that are tax deductible, there are some which aren’t. First of all, any cosmetic medical procedure will not be deductible. This includes liposuction, having your teeth whitened, breast implants and the like. Braces are in the category of cosmetic dental procedures, unless you have more serious issues with your teeth and the braces are a necessity. Any required medical procedure is not tax deductible until it is carried out. For example, if you have paid for a needed back procedure in December, but the procedure is not scheduled to happen until May, then you wouldn’t be able to deduct if from your taxes this year. Things which pertain to general health care (i.e. gym visits, the purchase of vitamins, etc) are not tax deductible.

Filing taxes is not a simple or easy job. There are lots of papers to fill out and details to remember that can be easy to miss possible tax deductions that can help you and your family to save a lot of money. If you or a dependant has had required medical treatment, then you can deduct the expenses for this from your tax return this year.

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