If you've had a credit-card company write off your debt, don't jump for joy too much because you're likely going to have to include that write-off as taxable income when you file your return. The Internal Revenue Service doesn't charge you taxes on money you borrow because you eventually have to pay it back. When the lender cancels your financial obligation, it's as if you've been paid money to pay off the debt. However, you may qualify to exclude the credit card write-off if it was discharged in a Chapter 11 bankruptcy or you were insolvent immediately before it was written off.
Look up the amount of canceled credit card debt in Box 2 of your Form 1099-C, which is used to report the amount of canceled debt. If you didn't receive a Form 1099-C, contact your credit card company because you're responsible for reporting the canceled debt as income even if you didn't receive the form.
Fill out the insolvency worksheet, found in IRS Publication 4681, to determine if you are considered insolvent at the time of the discharge. Generally, you are insolvent to the extent that your liabilities exceed your assets. For example, if you have $20,000 in debts, including your credit card debt, and only $15,000 in assets, you are insolvent by $5,000. If your credit card write-off was $6,000, you would be able to exclude all but $1,000 of the canceled debt.
Complete Form 982 if you are excluding some of the canceled debt from your income because of insolvency or a Chapter 11 bankruptcy. Include Form 982 when you file your federal income taxes.
Report the amount of the credit card debt that is included in your gross income on line 21 of Form 1040. Unless it's excluded by an exemption, the entire amount is included in your income. This amount is included in your taxable income for the year.
- There's a difference between a write-off, which doesn't necessarily get you off the hook, and a cancellation, which absolves you of your financial obligation. Include the credit card cancellation in your income even if you didn't receive a Form 1099-C. IRS Publication 4681 requires its inclusion even in the absence of receiving the form. Debt that's written off, but for which you're still liable, isn't reportable income until the debt is considered canceled.
- The IRS recognizes that some creditors will issue a 1099-C but either still collect on the debt, or sell the debt to a third-party collector. In effect, the taxpayer is on the hook for the "income" of the allegedly canceled debt with the IRS while simultaneously facing collection activity. If you get a 1099-C on an account that's still being collected, contact the issuer or a tax attorney for assistance.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."