Yes, but having the forgiveness happen in a low-income year would result in less taxes. So perhaps the charity could forgive debt in a way that is conditional on later income being donated to effective causes.
In the United States, marginal tax rates at the poverty line can, due to welfare or tax deductible cutoffs, be pretty punishing or even negative. Worse, because this income does not go through conventional channels, it can cause someone’s annual tax return to suddenly switch from a rebate to a payment—a payment that is difficult to delay and near-impossible to escape through bankruptcy, and that can only be challenged in the IRS’s very own home courts.
The rate is likely to go so blatantly negative in countries that lack phaseouts or means-tested welfare, but even those exceptions will still have that surprise tax bill.
It’s not a fatal problem, and there may be ways to limit or negate it—although any serious attempt will face serious and unfriendly tax scrutiny—but it’s a very significant problem.
Yes, but having the forgiveness happen in a low-income year would result in less taxes. So perhaps the charity could forgive debt in a way that is conditional on later income being donated to effective causes.
In the United States, marginal tax rates at the poverty line can, due to welfare or tax deductible cutoffs, be pretty punishing or even negative. Worse, because this income does not go through conventional channels, it can cause someone’s annual tax return to suddenly switch from a rebate to a payment—a payment that is difficult to delay and near-impossible to escape through bankruptcy, and that can only be challenged in the IRS’s very own home courts.
The rate is likely to go so blatantly negative in countries that lack phaseouts or means-tested welfare, but even those exceptions will still have that surprise tax bill.
It’s not a fatal problem, and there may be ways to limit or negate it—although any serious attempt will face serious and unfriendly tax scrutiny—but it’s a very significant problem.
Lots of U.S. government benefits for poor people are tied to income and wealth.