Reader Question: Credit Card and Taxes
Posted on January 13, 2009 by Him and tagged credit, taxes
Reader Jeff writes:
First, I settled two credit cards, paying 2,500 of a 6,000 balance. Got a letter saying I will be sent something for taxes. What is this about?
Anyone have any idea?
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Harry Frankenfeld | Jan 13, 2009
I believe any time a debt is settled for less than the actual debt, the remainder is considered income by the IRS, and subject to income tax.
Just wanted to echo the earlier commenters, he'll likely owe 2008 taxes (if it was settled last year) on the difference of the settlement and the debt. Depending on how much Reader Jeff makes, this may or may not increase his tax bill. If he doesn't make much, it may not be that big of a hit.
I experienced this little "surprise" last year. A huge chunk of my husband's debt was forgiven, but we wound up with quite a large bill to the IRS. Our debt settlement company never mentioned this little fact during our time with them, which irked me a bit, but hey, in the long run we still saved a lot of money, even after the taxes.
Luckily, you can create a payment plan with the IRS that has a pretty low interest rate (about 6% I think?) and you have a lot of time to pay it off. Not sure how long though -- they didn't give me a cut-off date when I set up my payment plan. You also have the ability to choose the amount you have withdrawn each month. When we were going through financial hardship during my unemployment, I was able to drop the monthly payment to as low as I wanted and the IRS didn't have a problem with that.
Betsy | Mar 16, 2009 | Reply to Julie
I just got home from tax preparer where I was told not only do I owe both fed. and state $300-plus,I also haveto pay a PENALTY on the difference from my settlement amount because I did not pay the taxes on them QUARTERLY!! Now, how in the heck are you supposed to know that? PLUS...they charged me $295.00 to do the stinking taxes!! I'm on total disability and other than the stupid credit card settlements, my info was a no-brainer...I'm in total shock.
Pev | Feb 1, 2009
Yeah before you agree to a settlement check what tax bracket you are in and if possible make the settlement at the beginning of the year - rather than at the end. That way your tax doesn't come until the upcoming year.
anonymous | Jan 13, 2009
When a debt is forgiven, the IRS may treat the "forgiven" amount as income.
http://www.irs.gov/taxtopics/tc431.html
I'm not sure if this applies to mortgage debt this year.
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