Canceled Credit Card Debt Could Lead to Tax Bills

Cash - IRSBillions of dollars in credit card debt that was charged off during the Great Recession— some of it decades old — is coming back to haunt borrowers in the form of unexpected tax bills.

Debt that is canceled or forgiven is considered
taxable income, something many borrowers don’t realize until they
receive a 1099-C tax form from their lender. The IRS projects that creditors will send taxpayers 6.4 million 1099-Cs in 2012, up from 3.9 million in 2010.

The
increase likely reflects the rise in credit card defaults during the
economic downturn, says Gerri Detweiler, personal finance expert for
Credit.com. Moody’s Investor Service estimates that the nation’s six
largest credit card companies wrote off more than $75 billion in
uncollectible balances in 2009 and 2010.

Taxpayers
who receive a 1099-C, which is also submitted to the IRS, are liable
for the tax bill unless they can prove that the debt was discharged in
bankruptcy or that they were insolvent when the debt was canceled, says
Jennifer MacMillan, an enrolled agent in Santa Barbara, Calif.

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SOURCE: Sandra Block, USA TODAY