Your Forgiven Credit Card Debt Could Be Taxable

by Chris Martin
Credit Cards › Credit Card News & Reviews
Your Forgiven Credit Card Debt Could Be Taxable

It’s almost April, which means the tax man cometh…and he might want to collect on that decades-old credit card debt you thought was ancient history. According to USA Today, debt that has been canceled or forgiven is actually considered taxable income. Many people don’t realize that, thinking they’re in the clear until a 1099-C tax form shows up in the mail.

What a shock to the system for someone who thought her debts had finally been erased. Those who receive a 1099-C are in fact liable for the tax bill unless they can prove that the debt wasn’t just forgiven, but discharged in bankruptcy. Or that they were completely insolvent when the debt was canceled.

USA Today notes that the IRS expects the number of 1099-Cs sent out to be on the rise this year, with an estimated 6.4 million taxpayers getting an ominous envelope. That number could be even greater in the future if a tax exemption for canceled mortgage debt expires at the end of 2012.

Any Other Tax Tips for Credit Card Users?

As long as you don’t have any old forgiven credit card debt lurking in your past, tax season is generally safe for credit card users. But that doesn’t mean there aren’t some weird tax quirks out there you should be aware of.

For example, Citibank caused quite a stir at the beginning of 2012 when it sent 1099 forms to customers who received 25,000 American Airlines miles for opening an account in 2011. Seems they viewed the rewards points as taxable income – but most people agree that call was a bit aggressive. Your other points and rewards should be safe.

If you pay your taxes by credit card, be warned that you’ll probably have to pay a convenience or processing fee (that goes to the processing company, not the government). But that convenience fee is actually considered a deductible business or personal expense.

And finally, if you’re staring at your yearly credit card statement roundup and wondering if there’s any way you can get back some of that interest you paid, think again. TurboTax explains that while interest payments on mortgages and business loans are deductible, the 14 percent you paid on your Amex bill is not.  

 

SOURCES:

http://www.usatoday.com/money/perfi/taxes/story/2012-03-02/irs-taxes-on-forgiven-debt/53357844/1

http://www.creditcards.org/article/your-frequent-flyer-miles-may-be-taxable-.html

http://www.irs.gov/efile/article/0,,id=101316,00.html

http://turbotax.intuit.com/tax-tools/tax-tips/Tax-Deductions-and-Credits/Is-Interest-on-Credit-Cards-Tax-Deductible-/INF14342.html

PHOTO CREDIT:

http://www.cityofchicago.org/city/en/progs/tax.html

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