The tax world is full of fascinating twists and turns.
This morning I was reading a tax court case that said an individual, Chad, didn’t owe taxes on a debt that was forgiven by Chad’s employer. The case was a bit skimpy on the facts, but it appears Chad ran up some debt with his employer and as part of a settlement, the employer agreed to write off the debt.
Under the tax code, if you are insolvent, your liabilities exceed your assets, you don’t have to pay taxes if someone forgives your debt. Evidently Chad was insolvent and thus didn’t have to pay taxes on the forgiveness of his debt.
As my coffee kicked in the ramifications of this ruling were pretty amazing. If you are insolvent, and what true American isn’t, you don’t owe taxes on the forgiveness of a debt.
Is it possible for an employer to loan you money from time to time? Yep.
When your employer loans you money is that taxable income? Probably not. You’re going to have to show that it was truly a loan with the expectation of repayment but once you get past that hurdle it should be non taxable.
What happens if after 5 years of getting these loans you find out that you were imprudent with your finances and can’t afford to pay it back? What if your employer decides to just write off the debt? It appears that was the fact pattern for this case, and Chad didn’t have to pay a dime.
Standard disclaimer. I am not advocating or promoting the above as a strategy to save taxes. Rather my coffee kicked in, my beagle left the room, and I had no one else to discuss this with.