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Feb 2017

Tax Season and Credit Card Debt Cancelations


With tax season here there are a number of 1099’s being issued. However, some people may be surprised to receive a 1099 due to a credit card write-off. People have many reasons why they are unable to pay their credit card bill including loss of job, income that is less than expected or unexpected expenses that pop-up. There are also some people that choose to not pay their bill. For those who settle their credit card balance for a lesser amount than what is owed, they can expect to receive a “1099-C” for tax purposes from their credit card company, as long as the amount that was written off (not paid) is $600 or more. This is considered “forgiven” or “canceled” debt and the IRS considers this taxable income. Thus, taxpayers must file this 1099-C on their federal income tax return.

The best way to explain this is with an example. Say a person has a credit card balance of $50,000. They can’t afford to pay their bill and through negotiations with their credit card company they agree to settle the balance at $20,000. Therefore, the credit card company “forgives” or “cancels” the remaining $30,000. This person then receives a 1099-C in the mail from the credit card company for the $30,000 of canceled debt. This $30,000 must be reported on this individual’s tax return as $30,000 of income.

One of the major issues is that consumers have no idea that when they settle their debt with a credit card company that they will receive a 1099 for the amount written off (and thus have to claim it as income). Some people throw the 1099-C in the trash as they figure their business with the credit card company is done. Thus they do not report this as income and are put at risk of penalties and fines from the IRS.

There are a few exceptions for those who have debt forgiven where they would not have to include the amount of canceled debt as taxable income. One of those exceptions is when the debt is canceled during bankruptcy. In this case the consumer filing bankruptcy would not have to claim the canceled debt as income. Another exception is debt canceled for consumers who are insolvent. For these consumers, insolvent means they have more liabilities than they do assets. However, this only applies to the amount a consumer is insolvent. As an example, if a consumer had $20,000 of debt canceled and their liabilities exceeded their assets by $5,000, then $5,000 would not be taxable, but the remaining $15,000 would be.

So if you are considering settling any debt, just be aware that the amount of debt “canceled” or “forgiven” will become taxable income. You will receive a 1099-C and you will have to pay tax on it.