Cancelled Credit Card Debt Could Be Taxable
Cardholders who had some credit card debt forgiven in 2009 may be surprised to discover that this forgiven debt may be viewed by the IRS as taxable income.
If you have arranged a debt settlement to pay less than your balance to close a credit card account, and the amount is over $600, you will need to pay taxes on the forgiven debt.
There was a surge in credit card debt forgiveness in 2009. According to the IRS, more than 2.5 million people will be receiving 1099 forms, because they owe income taxes on forgiven debt from car loans or credit cards.
When you have cancelled credit card debt, your lender will send you a Form 1099-C showing the amount of the cancelled debt. If you know you had some cancelled debt but don’t recall receiving a Form 1099-C, call your issuer to request one. You will still owe the tax even if you don’t remember receiving the form or can’t find it.
Banks are also forgiving mortgage debt but the government treats this differently. The Mortgage Debt Relief Act of 2007 rules that until 2012, most taxpayers will be able to exclude the assumed income from the discharge of debt on their principal residence.
If consumers are negotiating a debt settlement on their credit cards, they should keep all paperwork and records of any conversation with their issuer. If you did receive some debt forgiveness, it may be a good idea to get the help of a tax adviser before you file your income taxes because this can get complicated. There are several exclusions concerning debts discharged during bankruptcy and debts of people who are insolvent.