How much tax do you pay on canceled debt?
To Her Credit
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also writes regularly for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Steward Radio and other programs. See her website SallyHerigstad.com
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Dear To Her Credit,
How much tax will I pay on a $957 debt that a credit card
canceled? They did send me a 1099-C Cancellation of Debt form. Please advise.
Thank you. -- Cynthia
The amount of federal income tax on $957 depends on many
factors. If I were to hazard a guess, it would be about $240. That assumes you
are in the 25 percent tax bracket -- in other words, you pay 25 percent of
every additional dollar of income on your return.
If your income after deductions is less than about $35,000
(about $70,000 if you are married and you file jointly) you may be in the 15
percent tax bracket. In that case, an additional $957 will only cost you about
$144 in income tax.
It's never going to be exact. Many credits and deductions have
limits and phase-out ranges that depend on your adjusted gross income. An
additional $957 in income can set off a complicated chain of tax events.
Perhaps the best way to determine how much it would affect you is to use tax
software. You can find online software that doesn't take your credit card until
you're ready to file -- if at all. I highly recommend letting the software do
the hard work for you.
Your state income tax is generally calculated starting with
your federal income tax return amounts, so don't forget to allow for an
increase in state tax, too.
Most Americans expect a refund check every year. The average
refund for the 2011 tax year was almost $3,000. If you're one of those who
expect a refund every year, you may hardly notice a difference of $144 to $240
in your tax bill. If you usually cut it closer, however, you may want to plan
You can change your withholding amount to have a little more
taken out every month. Print out a new Form W-4, fill it out and take it to
your payroll department. If you don't know how to fill it out, ask an
accountant. I don't find the Internal Revenue Service worksheet that comes with Form W-4 to be
I've had better luck with the IRS Withholding Calculator. If you have your most recent pay stub handy, you can use this online
calculator to quickly estimate the best way to fill out your Form W-4 and have
the right amount of tax withheld for the rest of the year.
Another way to take care of that tax bill now is to simply
send it in. Write a check to the IRS with your Social Security number on the
check. Print out a voucher from the IRS website and send it with the check to the
address in the instructions. You do not need to fill out the estimated tax
I do not recommend paying the IRS with your online banking
bill pay system. It's too easy for the payment to be misapplied. Paying by
credit card isn't perfect, either, because you'll get hit by extra fees from
your bank. If you want to pay the IRS online, use the Electronic Federal Tax
Payment System on the IRS website.
Even if you don't get a refund next year or if you have to
pay something, you're not likely to owe interest and penalties. The IRS does
not impose penalties for underpayment of tax unless you owe $1,000 or more when
you file your return.
See related: 1099-C surprise: IRS tax follows canceled debt, How settled card accounts impact your credit report
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