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Forgiven medical debt could mean increased tax debt

Comedian John Oliver knows how to make a point. He did it again earlier this month when he took it upon himself to buy up $15 million in consumer medical debt and then proceeded to forgive it all. Perhaps someone in Illinois is smiling today as a result.

Oliver's effort wasn't merely one of trying to do something nice for some 9,000 recipients. He did it to show just how easy it can be for creditors to write off uncollected debt by selling it off down a chain of collectors. Very often, what happens is that the debt winds up in the hands of a business that has no qualms about harassing debtors to collect.

As generous as the Oliver gesture was, and how revealing it was about how easy it is for unscrupulous people to get set up in the collection business, some experts raised questions about its wisdom. They wondered whether those who received the forgiveness might not be hit with a tax bill based on the idea that because they no longer have a debt obligation, they realized a gain in income.

It should be no surprise that the IRS has a rule covering this sort of thing. It falls under Section 61(a)(12) of the IRS code and is called "Cancellation of Debt Income." However, at least one pundit says that the way Oliver worked out his play means recipients of his largesse won't face any tax bite. That's because another section of the code says if a debt could be deducted when filing, then it can't be counted as income -- it's excluded. Medical debt not compensated for by insurance is eligible for deduction.

The tax implication of any financial activity is easy to get confused about. How many times have you heard someone say they called the IRS several times with a question and got different answers every time?

It's great when tax obligations don't exist, but tax debt may be discharged through bankruptcy. The process is far from simple and requires the skills of experienced legal counsel. We welcome your inquiries.

Source: Forbes, "John Oliver Buys And Forgives $15 Million in Medical Debt, But Is The Forgiveness Taxable?," Tony Nitti, June 6, 2016

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