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Tax Consequences of Settling Your Credit Card Debt; The 1099-C

American consumers owe an amazing $18.7 billion in credit card debt, according to the New York Times.  During the recent economic turmoil, many consumers have hired legal counsel to negotiate a settlement of their credit card debt for less – sometimes much less – than they owe.

Obviously, reducing the amount owed to a credit card company is a great result.  However, one should be aware that tax consequences exist for such an arrangement.  Under the Internal Revenue Code Section 61(a)(12), gross income includes “income from discharge of indebtedness.”  This means that any reduction in your credit card liability will increase your gross income dollar-for-dollar.

If you have reached such an agreement with a credit card company, Section 6050P of the Code requires that company to file a Form 1099-C with the IRS and also provide a copy to you (provided the debt cancellation was $600.00 or more).

For example, if a taxpayer owes $20,000 in credit card debt and reaches a deal with the credit card company to reduce that debt to $11,000, the company would provide the taxpayer with a Form 1099-C indicating $9,000 of debt discharge.  Section 61 would mandate that the person include $9,000 of income as “other income” (1040, Line 21).  Such “discharge of indebtedness” will be taxable to that person according to the taxpayer’s particular tax factors (income, deductions, etc.).

Prescott Law Group can supply the assistance you need in settling your credit card debt and will ensure that you are made fully aware of the consequences (tax and otherwise) of a negotiated settlement.

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