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I received a 1099 debt reduction for the first time, and i truly don’t know what to make of it. Is it going to hurt my federal tax refund or help it. Could someone please explain it so I can understand why I am receiving this and what it means. Thanks a lot!

3 Thoughts on Does a debt reduction increase or decrease your tax refund?
  1. Reply
    Ryan M
    August 14, 2011 at 5:15 am

    it decreases it since that is untaxed income that is being added to your AGI. Why would you get a tax benefit for NOT living up to your legal obligation??

  2. Reply
    the tax lady
    August 14, 2011 at 5:57 am

    It hurts it.

    If you owed $ 10,000 in credit card debt and settled for $ 4,000; the $ 6000 you didn’t pay is income to you for tax purposes. You list it on form 1040, line 21 as other income.

    There are exceptions for bankruptcy and insolvency. See irs pub 4681 to see if you are eligible to exclude any of it.

  3. Reply
    dawgdays
    August 14, 2011 at 6:35 am

    You report it as “other income”, as it says to do in the instructions on the back of the 1-99-C form.

    So it will increase your tax liability, and if you had a refund due, it will reduce it.

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