IRS Makes You Pay Money when you Save Money

By: Jerri Simpson

If you pay less than the full amount of any debt the IRS makes you pay tax on that money. An example would be if you owed $1,000 to Chase on a credit card and you settled with them for $400. The IRS considers that $600 as income to you and you will have to pay tax on that money.

How does that make any sense at all you ask? Well I ask the same question because it isnít money that you actually received being what INCOME would be defined as. Money that was actually received for something or in exchange for something is what is considered income. So where does the IRS get off in making you pay tax on that money that you save? Because they can! So at the end of the day you got a settlement with a creditor, that they agreed to, and now you have to pay tax on that money that you saved.

Really creepy, I say!

If you are in a situation where you have saved money and have a 1099C form from a creditor, find out a few things that could help you so that you may not have to pay that tax.

Did you settle that account because you didnít have the money to pay?

Are you in a financial situation that is not optimum and are having problems making ends meet?

If you answered YES to either of these questions, then you may be eligible for a tax break on those pesky taxes. You would normally claim 33% of the saved amount as income, but if you can prove financial insolvency then you may owe nothing. Find out by going to the website and looking at form 982. This form determines if you are financial insolvent or not.

If you donít do your own taxes then I would recommend you get with your tax professional and ask him that question. You never know what could happen. But remember, I am not a tax attorney or tax professional and you should always consult one when you have a question, Iím just letting you know that there may be a way to not pay those taxes. On the other hand, if you have the money and DONíT have a financial hardship, then by all means, pay your taxes on the money you saved.

The Debt Lady says, ďIf you know you have options, then why would you do anything else?Ē

Now, to lighten things up a bit, hereís a little poem I wrote about credit card debt:

Johnny had a little debt
Its name was Citibank
And everywhere that Johnny went
His card was sure to go

He bought a pair of jeans one day
And a computer with his card
Next he tried some Girl Scout cookies
But the card said no, no, no

Now Johnnyís little card
Has turned into quite a debt
And everywhere that Johnny goes
Cash is all thatís spent

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Jerri Simpson, known as ďThe Debt LadyĒ (, has worked in the finance industry for over 31 years, helping others conquer their financial troubles ( and is well-known for her blogs (

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