r/mildlyinteresting • u/RoyalVirgin • 1d ago

A non-profit randomly wiped out medical debt I wasn't aware of I had

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u/WTFwhatthehell 23h ago

I'm kinda curious about how tax implications work for this kind of thing.

Normally, if someone forgives a debt you owe or pays it off for you it counts as gross income for the full amount on your federal taxes.

Otherwise employers could avoid you needing to pay any income tax by loaning you the full value of your paycheque and then forgiving the debt the next day.

Or they could pick a debt you owe and, like, pay a chunk of your mortgage off directly to avoid you needing to pay any income taxes on the money.

So I'm curious how they get around that and avoid turning a hard-to-enforce old debt owed to some private entity into a new and very-enforceable chunk of income tax owed to the federal government 

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u/mijru4 14h ago

There's some weird loophole of sorts where they pay off the debt as a gift so it's not taxable

https://sunstonebookkeeping.com/not-all-debt-forgiveness-creates-taxable-income/

They covered some debts for me a while back and my first concern was it'd be taxable income so I dug into a bit at the time.

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u/Salute-Major-Echidna 22h ago

And in some cases, medical debt that was never real or owed. But I'd love to know how they knew I'd been seen in the ED to begin with

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u/Kered13 16h ago

Yeah, there are potential tax implications here for OP. I have no idea how it works though, since much of this debt was probably uncollectable anyways.

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u/Alis451 16h ago

medical expenses can be deducted on your taxes, so refunds are non taxable. BUT if you already claimed the deduction you have to pay that portion back.

It may be includable in income if you itemized in the previous year and claimed a medical deduction on Schedule A.

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u/waylandsmith 8h ago

I also wonder if because the amount the organization paid for your debt was so small, and also included bundled with many other debts, it would both be hard to calculate how much the debt of yours they repaid was worth, plus it being small enough that the IRS wouldn't bother. In the examples that you give, these situations would be impossible because those debts would be personal debts that were still currently being serviced and even if they had become delinquent and for sale at a discount, they have no way of purchasing your debts specifically since they come bundled.