Some of you might be in the process of negotiating a settlement with your credit card companies. The companies might agree to “settle” with you for a lower amount than what you owe. While this is great, there’s one thing you might not have expected, it’s taxable. The amount that is taxable is the forgiven amount. Let’s say you owe the credit card company $10,000. They agree to settle for $7,000. This means they have forgiven you a total of $3,000. The IRS calls this “forgiveness of debt”. They will then tax you on the $3,000.
The credit card company will send you a Form 1099 that will show the $3,000. You are going to have to pay taxes on the $3,000. You might be saying to yourself, “That’s ridiculous.” No, that’s the law. You might also think that it’s not worth it to settle for a lower amount. However, in the long run you will end up paying more in interest to the credit card company than you will pay out in taxes. Just don’t forget that it’s taxable when you do your taxes.
By the way, you can’t leave it off your taxes. The credit card company, as all financial institutions and employers do, will send a copy of the Form 1099 to the IRS. If you leave it off, the IRS might not catch it until the following year. At which time, they will charge you interest and penalties on the unreported income. Therefore, be smart and claim it.