Is Credit Card Debt Forgiveness Taxable?

Paying taxes on forgiven debt can sometimes seem as bad as having overwhelming debt.

Many Americans are swimming in credit card debt. Debt can be forgiven under certain circumstances, and most people are thrilled when this happens. Not so thrilling is learning that much of the forgiven debt is taxable.

Forgiven Debt is Taxable

When a credit card company or other debtor forgives a portion of debt, it is considered a loss for the business. This loss must be equalized with income for the forgiven debtor.

Does the IRS Know?

Most companies report forgiven debt to the IRS and the debtor on form I099-C. This form is usually only used when the canceled debt is $600 or more.

The Amount of Tax

The amount of tax owed will depend upon overall income and certain exceptions and exclusions. The largest exclusion affecting credit card debt is insolvency.

Insolvency

If a forgiven debtor has more debts than assets they are considered insolvent and the taxable amount of canceled debt is reduced or eliminated.

How the Tax is Determined

Using IRS Publication 4681 and Form 982, a taxpayer can figure if any forgiven debt is taxable and report it accordingly.

References

• IRS Form 1099-C Cancellation of Debt
• IRS Publication 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments
• IRS Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness

Resources

• IRS Publication 525 Taxable and Nontaxable Income