Bottom Line
Tax Tips
Getting back on track

By Howard Abrams
PBS Tax & Bookkeeping


Our economy has wreaked havoc on most everyone’s financial situation. Incomes are down drastically, home values have declined, and credit scores have been slashed. Taxes and other obligations must be considered when trying to work your way out of deep debt.

Q: We have incurred more than $20,000 in credit card debt and negotiated a settlement for $5,000. The credit card company said they will issue a 1099-C for the difference of $15,000 – meaning we will have to include that amount in our 2010 income taxes. Our problem is we won’t be able to pay for the taxes we might owe. Do you have any advice?

A: You are going to have to set enough money aside to pay your tax obligation come April 2011. You should increase the amount of estimated tax payments you will make toward the 2010 tax return so you can avoid penalties and interest.

You could look into a home equity line of credit to pay the tax since the interest will be much less than the IRS penalties and interest. You also could set up a long-term installment plan with the IRS by filing form 9465, but you will still incur penalties and interest.

Q: My wife has a 401(k) plan and our situation has prompted us to think about her taking money out to pay the IRS and some other bills. Should she?

A: No, because she would pay income tax and penalties on any 401(k) withdrawals. Plus, it would reduce the amount of money that could grow inside the plan if it were left alone.

Q: She would not have tax and penalties on the withdrawal because she’s 67 years old. Could she then withdraw the funds to pay the IRS?

A: Yes, she could certainly justify doing that. At her age, the amount of potential future gains she is giving up on that money would be less. The older we get, the more conservative our investments should be because we have a shorter time span to grow our money. She would still pay income tax on the funds withdrawn but there would not be a penalty.

But dipping into a 401(k) to pay unsecured debts may still be a bad move if there is any chance you and your spouse will wind up in bankruptcy court, because retirement funds are protected from creditors. It’s also unwise if she would be withdrawing a large part of the family’s nest egg, because this money has to last a lifetime.

Q: I am upside down on my house. I owe more than my home is worth, and I’m having trouble making the payments. What can I do?  

A: You should explore a loan modification. Our government has encouraged our lenders to help homeowners in financial distress to avoid foreclosure. By modifying your loan you may get a temporary reduction in your payments or a permanent reduction of your mortgage and payments.

Q: How would I do that?

A: There are various companies available to assist you. But be careful. Do not pay any upfront fees. A legitimate company will prepare and process your modification and make their fee on the back end when the modification is completed. But I would first contact your lender to see if they will do the modification with you directly, thus avoiding the middle person.

NOTE: If you are having problems making your mortgage payments (even though your loan balance may be less than the value of your home), you should explore a “loan modification.” LL


Everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax professional.

This article is written by PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for more than a quarter-century. If you would like further information, please contact PBS at 800-697-5153 or visit their Web site at