I want to settle a credit card debt but am afraid of the tax hit. What should i do?
I am mulling an offer from a debt collector for Citibank visa on my wifes account. The account was already charged off by citibank and now in the hands of the collector. The offer to settle is very good but its almost 3000 dollars off and i am afraid the reduced debt will be taxed like crazy by IRS. I really dont have to settle because my wife is on Social Security disability and cannot be garnised as per law. Does anyone know what the tax hit would be? Its about 3k off the original debt.
Posted May 17th, 2010 in Debt Settlement. Tagged: citibank visa, debt collector, irs, social security, social security disability.
The $3000 discount would be taxed just like your income. So you would have to pay a percentage of it according to what tax bracket you are in.
I would take it. Even if your wife cannot be garnished, there are other benefits to being debt-free. And just because they cannot garnish wages doesn’t mean they cannot collect in other ways.
May 17th, 2010 at 7:06 amAny amount of money "forgiven" in a settlement offer is taxable, you are right about that. I would initially say you should absolutely settle your debts. If you accept and pay the settlement you will receive a 1099-C from the creditor in the mail. This will detail out what amount in taxes you will owe on the difference value of forgiven debt. You should look at this in a different light, though. This is not a burden level but instead it is considered income. The small portion of taxes paid against a difference value is insignificant against benefits of better credit, lower rates and the actual amount owed.
May 17th, 2010 at 7:06 am