If you can't pay your credit card debt, the credit card company may agree to write down or write off the amounts that you owe. While this is likely welcome news for you, it also can mean you'll owe the Internal Revenue Service more money come tax time. As a general rule, the amount of debt you're forgiven counts as taxable income. You'll receive a Form 1099-C that shows the amount of the debt written off at the end of the year.
Insolvency or Bankruptcy Exceptions
Two exceptions can make your credit card debt forgiveness nontaxable: if it's discharged as part of your bankruptcy filing, or it you're insolvent. "Insolvent" means that your assets like your house, car and cash are less than your debts. Say you have $20,000 in assets, $24,000 in debt, and your credit card company writes off $5,000 of your credit card debt. Because your debts exceed your assets by $4,000, only $1,000 of your debt forgiveness counts as taxable income.
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