The following is presented for informational purposes only. Consult with a tax professional for questions specific to your unique situation.
Credit card debt can have an affect on your credit rating, but what about your tax return? For the most part, your credit card debthas no impact on your tax returns, but there are some very specific circ*mstances where debt can have a major impact on your return and your chances of collecting a refund.
Garnishment and tax refunds
If you owe money to a credit card company, they cannot garnish your refundto cover your debt. However, they can put a lien on your bank account and seize your funds after they’re deposited.
Your tax refund is safe from garnishment from credit card companies and collection agencies. But they are able to take you to courtfor your debt and receive a judgment in their favor, meaning the court may order you to pay what you owe. If this happens, the credit card companies and collection agencies can levy your bank accounts or garnish your wages.
Only the government can garnish your tax refund, and only for debts you owe to the government like unpaid state or federal taxes, unpaid federal student loans, or child support. As long as you don’t owe money to a state or federal agency, your refund will be processed and sent to you.
But if you request your refund to be directly deposited to your bank account, a collection agency with a lien on your account could take those funds even if they are a tax refund. If you have a judgment against you, you may wish to request a refund check by mail that you can then cash.
Debt settlement and your tax bill
Settling with your creditorscan have a big impact on how much money you get back come tax time.
If you settled any of your credit card debt for less than what you owed over the past year – and the difference was greater than $600 – you will receive a 1099-C form from that credit card company. The difference between what you owed and what you actually paid is considered income by the IRS. This means you will need to pay taxes on it. Depending on how much you settled, it can even change your tax bracket.
Don’t ignore it. The company you settled with will send this form to the IRS as well, so it will eventually catch up with you. But by then, you may also be responsible for late fees and penalties for not reporting it.
If you did settle debt over the past year, start planning for how much you might owe in taxes for the amount that was forgiven. As a general rule of thumb, plan on 30% towards federal and 10% towards state. These numbers may be different based on your income and filing status.
Credit card debt will not prevent you from receiving your tax refund, but it can affect how much of a refund you receive if you had a debt settlement. If you think you may owe taxes due to a debt settlement, start planning now so that you can save for what you will owe.
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Emilie writes about overcoming debt, while balancing trying to eat healthy, stay fit, and have a little fun along the way. You can find more of her work at BurkeDoes.com.
FAQs
Credit card debt will not prevent you from receiving your tax refund, but it can affect how much of a refund you receive if you had a debt settlement. If you think you may owe taxes due to a debt settlement, start planning now so that you can save for what you will owe.
Does the IRS get involved with credit card debt? ›
Private collection agencies cannot take any type of enforcement action against you to collect your debt. However, the IRS does have the legal authority to file a Notice of Federal Tax Lien or issue a levy to collect an overdue account.
How does settling credit card debt affect taxes? ›
You should expect to pay the same income tax rate for settled debt as you pay on your income. For example, if you're in the 22% income tax bracket and have $600 worth of canceled debt, the tax bill would come out to $132 ($600 x 0.22).
Do you get a tax break for paying off credit card debt? ›
Key Takeaways
Credit card interest is not deductible on income taxes. The personal interest deduction was eliminated in the Tax Reform Act of 1986. Interest payments on home loans, student loans, and investment property may be tax-deductible. Personal expenses cannot be deducted as business expenses.
Is credit card debt considered income? ›
The law requires that you report all taxable canceled debt as income on your tax return, even if the amount is less than $600 and you didn't receive a Form 1099-C. Canceled debt is taxed at same rate as your ordinary income, which can be anywhere from 10% to 37% depending on your total taxable income.
Can credit card debt affect tax returns? ›
Credit card debt will not prevent you from receiving your tax refund, but it can affect how much of a refund you receive if you had a debt settlement. If you think you may owe taxes due to a debt settlement, start planning now so that you can save for what you will owe.
Does the IRS look at credit card statements? ›
In conducting the tax audit, the IRS will request to see receipts, invoices, records, credit card statements, cancelled checks, and other documents. During this process, the IRS checks whether you stated income and expenses accurately on your income tax return.
Does debt collection affect tax return? ›
Do you have an outstanding debt that's past due and you're concerned that a collection agency will take your federal tax refund because of it? Well, you'll be happy to know that most collection agencies aren't able to claim your tax refund directly from the IRS.
Is it a bad idea to settle credit card debt? ›
Debt settlement can eliminate outstanding obligations, but it can negatively impact your credit score. Stronger credit scores may be more significantly impacted by a debt settlement. The best type of debt to settle is a single large obligation that is one to three years past due.
Does debt consolidation affect your tax return? ›
Debt Settlement Tax Consequences
The IRS considers any debt cancelation of $600 or more as additional income — and taxable — even if you didn't actually receive any money.
In most situations, if you receive a Form 1099-C from a lender, you'll have to report the amount of cancelled debt on your tax return as taxable income. Certain exceptions do apply.
How does debt write off affect taxes? ›
In general, if your debt is canceled, forgiven, or discharged for less than the amount owed, the amount of the canceled debt is taxable. If taxable, you must report the canceled debt on your tax return for the year in which the cancellation occurred.
How does a credit card charge off affect your taxes? ›
Charge-offs are considered taxable income. This means that the amount of the debt that is written off may be counted as income on your tax return. For example, if you owed $10,000 on a credit card and the creditor wrote off $5,000, you may have to report that $5,000 as income on your taxes.
How does settling a debt affect taxes? ›
Settled debt is taxed as ordinary income. The amount you'll pay is based on your tax bracket and marginal tax rate. Say you earn $75,000 a year as a single taxpayer. Your top marginal tax rate is 22%, so any additional income from a settled debt will be taxed at 22%.
Are credit cards included in debt-to-income? ›
Your debt-to-income ratio (DTI) compares how much you owe each month to how much you earn. Specifically, it's the percentage of your gross monthly income (before taxes) that goes towards payments for rent, mortgage, credit cards, or other debt.
How to find out if your income tax refund will be garnished? ›
Not all debts are subject to a tax refund offset. To determine whether an offset will occur on a debt owed (other than federal tax), contact BFS's TOP call center at 800-304-3107 (800-877-8339 for TTY/TDD help).
Do credit card companies report to the IRS? ›
Payment card companies, payment apps and online marketplaces are required to fill out Form 1099-K and send it to the IRS each year. They must also send a copy to you by January 31.
Does the IRS track credit card payments? ›
A 2008 law, known as the Housing and Economic Recovery Act, mandated that debit and credit card payments be tracked by banks and reported to the IRS.
Does the IRS take credit card payments for taxes? ›
The IRS does not charge a fee but convenience fees apply and vary by the payment processor. If you prefer to pay with your mobile device, you can do so with the IRS2Go app. You can pay with Direct Pay or by debit or credit card.
Do we receive credit card debt forgiveness? ›
Credit card debt can be overwhelming — but it can also be forgiven in some cases. If you have a significant amount of debt compared to your income, you may qualify for credit card debt forgiveness, so consider reaching out to a debt settlement company for help.
