Found an issue on this page? Let us know and we will look into it as soon as possible.
Debt forgiveness and taxes
Anonymous2 views4 answers
My situation. Single, no kids, caregiver to a parent, IRA, no taxable income, no assets. If you make a deal with your credit card companies to pay off a balance for less, I know you're taxed on the amount of debt forgiven. The amount forgiven is counted as income. If you have little or no taxable income, and with standard deductions, would you pay little or no taxes on the amount forgiven?
Generally speaking, that is correct. The less income you have, the less income taxes you pay.
Also note that you may be able to exclude the canceled debt from income if the cancellation occurred in a Chapter 11 bankruptcy case or you were "insolvent" immediately before the cancellation.
For more information on debt forgiveness, see:
http://www.irs.gov/pub/irs-pdf/p4681.pdf
Mr. Chen and Mr. Nielsen are correct. Be aware in addition that you need do nothing unless you receive a Form 1099 (a copy of the credit card's report to the IRS of the forgiven debt income) and the amount is enough to require you to file a Forme 1040. Only then do you need to consider the use of Form 982, and whether the actual tax amounts to much.
Best wishes for a favorable outcome, and please remember to designate a best answer.
Very likely. It obviously depends on the amont of the forgiveness but you have a number of deductions and exemptions that will be applied against the income generated by the forgiven debt so there's a good chance your taxable income from the situation you described is low. In addition, you may qualify for one of the various exemptions provided for under current law to eliminate any tax liability associated with the forgiven debt in its entirety. Take a look at IRS 982 and associated instructions for details.
Good Luck!
