Can Credit Card Debt Affect Your Tax Return?

Two young woman working on their taxes.

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 debt has no impact on your tax returns, but there are some very specific circumstances 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 refund to 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 court for 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 creditors can 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.

Stressed about debt? We can help! Debt management plans from MMI are an excellent way to speed up your debt repayment and save money in the process. Best of all, it's not a loan so there's no credit requirement and you can cancel anytime. Begin an online analysis and see how much you can save.

Tagged in Taxes

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

  • Better Business Bureau A+ rating Better Business Bureau
    MMI is proud to have achieved an A+ rating from the Better Business Bureau (BBB), a nonprofit organization focused on promoting and improving marketplace trust. The BBB investigates charges of fraud against both consumers and businesses, sets standards for truthfulness in advertising, and evaluates the trustworthiness of businesses and charities, providing a score from A+ (highest) to F (lowest).
  • Financial Counseling Association of America Financial Counseling Association of America
    MMI is a proud member of the Financial Counseling Association of America (FCAA), a national association representing financial counseling companies that provide consumer credit counseling, housing counseling, student loan counseling, bankruptcy counseling, debt management, and various financial education services.
  • Trustpilot Trustpilot
    MMI is rated as “Excellent” (4.9/5) by reviewers on Trustpilot, a global, online consumer review platform dedicated to openness and transparency. Since 2007, Trustpilot has received over 116 million customer reviews for nearly 500,000 different websites and businesses. See what others are saying about the work we do.
  • Department of Housing and Urban Development - Equal Housing Opportunity Department of Housing and Urban Development
    MMI is certified by the U.S. Department of Housing and Urban Development (HUD) to provide consumer housing counseling. The mission of HUD is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD provides support services directly and through approved, local agencies like MMI.
  • Council on Accreditation Council On Accreditation
    MMI is proudly accredited by the Council on Accreditation (COA), an international, independent, nonprofit, human service accrediting organization. COA’s thorough, peer-reviewed accreditation process is designed to ensure that organizations like MMI are providing the highest standard of service and support for clients and employees alike.
  • National Foundation for Credit Counseling National Foundation for Credit Counseling
    MMI is a longstanding member of the National Foundation for Credit Counseling® (NFCC®), the nation’s largest nonprofit financial counseling organization. Founded in 1951, the NFCC’s mission is to promote financially responsible behavior and help member organizations like MMI deliver the highest-quality financial education and counseling services.