What's The Deal With The Credit Card Debt Settlement Tax?

If you've ever settled a debt with a credit card debt reduction company, you've probably had to fill out an IRS 1099 form. What's this for? The form is actually for the credit card debt settlement tax. The IRS wants to tax you for every settlement you make with a credit card company. They do this because, well, because they can, but also because the money you save on the settlement is actually recorded as income. There's not really any way to avoid the credit card debt settlement tax. And it's not like you're going to lose everything you've saved. It's just that the IRS wants to get their taxes, and it's still better than giving all of your hard earned money to the credit card companies. So whether you're calling the credit card companies directly or you're using a credit card debt management company, you should be prepared to pay a credit card debt settlement tax.

Your Settlement

So what is a settlement? A credit card debt settlement is when you contact the credit card companies and you tell them you'll pay them a fraction of what you owe if they mark your record clean. Now keep in mind that paying a credit card settlement is going to negatively affect your credit report, even if you use it to pay off your debt entirely. People checking your credit will see that you reached a settlement and for that reason they may be hesitant to offer you any credit at all. Still, if you don't have a choice, a credit card settlement is a great way to save money while also getting out of debt. Just be prepared to pay that credit card debt settlement tax.

IRS 1099

Credit card debt settlement companies will negotiate your debt and will then help you take care of it so that you don't have debt hovering over your head. They will then send you a 1099 form from the IRS for you to fill out so that you can add it to your tax returns. This form is very important as you never want to withhold anything from the IRS unless you'd like to welcome an audit. The form is simple to fill out and there are clear instructions on the form in case you need any help.

The Tax

So what is this tax? The credit card debt settlement tax taxes the money you saved on your settlement. Let's say, for example, that you owe $1500.00 to MasterCard. You call them and negotiate a settlement for $800.00. That one phone call just saved you $700.00! The 1099 form will ask you how much you saved and that's where you put that $700.00. This essentially means that you're going to be taxed on that $700.00 because the IRS considers it income. It doesn't seem right that you have to pay taxes on money you saved but that's how the system works and you can't say no to the IRS unless you want them knocking at your door.