Credit Card Debts May Be Forgiven, but Not Forgotten by IRS
February 18th, 2010 § 2 Comments
All may be forgiven when a creditor settles your account, reducing the amount you owe, but that doesn’t mean you’ve gotten a free ride. Your windfall may be taxable.
The IRS can tax debt forgiveness as Income. So let’s say you owed $15,000 on your credit card. The card company settles the debt with you for $5000. You are overjoyed at the saved money, until you realize the IRS expects you to declare that $10,000 savings. That amount is known as discharge of indebtedness, or DOI, income.
That’s right. A debt forgiven won’t be forgotten by the IRS. The agency considers it earned and taxable income. In fact, your creditor probably will send you a 1099 form detailing your miscellaneous income. Don’t think you’re free from the IRS if you don’t get the form. The creditor may have reported the “income” to the IRS, even though you didn’t receive a 1099.
Great post! People should always keep in mind there’s no such thing as “free money.” Most discounts and savings along these lines can be considered income by the IRS. Nice alert.
http://GoodWitchBadWitch.com
[...] Valerie, of Newton, Tex., contacted Consumer Affairs about a fairly serious tax problem. Her trucking business filed bankruptcy in 2001 and included two credit cards with Cross Country Bank in the filing. Since that time she was contacted by the IRS showing that credit card debt dismissed in 2010. According to IRS she did not pay taxes on the cancelled debt. (See Debt Forgiven but not forgotten by IRS.) [...]