01-04-2025
3 ways credit card debt relief can impact your taxes this year
When you're struggling with
growing credit card debt
, finding relief can feel like a weight has been lifted off your shoulders. Whether through negotiated settlements,
forgiveness programs
or bankruptcy, escaping the cycle of minimum payments and mounting interest brings undeniable peace of mind. But there's a catch that many don't see coming until tax season rolls around.
Debt relief can trigger significant tax consequences, which means that without proper planning, you could find yourself trading credit card debt for
tax debt
, which comes with its own set of challenges and collection powers. The last thing you want is to be caught off guard during tax season, so it's important to understand how
credit card debt relief
affects your taxes. That way, you can ensure you're prepared and able to navigate any potential liabilities.
By factoring the potential tax implications, outlined below, into
your debt relief strategy
, you can avoid unexpected pitfalls and maximize the benefits of getting your financial life back on track.
Start the credit card debt relief process today
.
Here's what you need to know about how credit card debt relief can impact your tax situation this year:
When a credit card company forgives or cancels your debt — whether through debt forgiveness, direct negotiation or a charge-off — the Internal Revenue Service (IRS) typically
considers the canceled debt as taxable income
. For example, if you settled a $10,000 credit card debt for $4,000, the $6,000 that was forgiven might be treated as income on your tax return.
In these cases, the credit card company will generally send you a
Form 1099-C, "Cancellation of Debt,"
which reports the amount of debt forgiven to both you and the IRS. This amount gets added to your other income sources, potentially pushing you into a higher tax bracket and increasing your overall tax liability.
How to deal with it:
Review any 1099-C forms carefully for accuracy and include the forgiven debt on your tax return (usually on Schedule 1 of Form 1040). If you've had significant debt forgiveness, you should also consider consulting a tax professional to explore possible exclusions or to prepare for the additional tax burden.
Learn more about your debt relief options now
.
There are two major ways to potentially avoid taxes on forgiven credit card debt: insolvency and
bankruptcy
. If you were "insolvent" when the debt was forgiven (meaning your total debts exceeded the fair market value of your total assets), you might qualify for an exclusion that reduces or eliminates the tax impact.
For example, if your total debts were $50,000 and your total assets were worth $40,000, you were insolvent by $10,000. If $15,000 of debt was forgiven, you could exclude up to $10,000 from your income, but would still need to report the remaining $5,000 as taxable income.
On the other hand, debts discharged through bankruptcy proceedings are not considered taxable income. This is one of the few straightforward exclusions in the tax code regarding forgiven debt. If you've
gone through Chapter 7
or Chapter 13 bankruptcy and had credit card debt discharged as part of the proceedings, you won't need to report that forgiven amount as income on your tax return.
How to deal with it:
Use
IRS Form 982, "Reduction of Tax Attributes Due to Discharge of Indebtedness,"
to claim either the insolvency or bankruptcy exclusion. Be sure to document your assets and liabilities carefully to support any claim of insolvency, or keep documentation of your bankruptcy discharge to support your tax filing.
The tax impact of
debt forgiveness
falls in the year the debt was actually canceled, not when you stopped making payments or when you reached an agreement with creditors. This timing element creates opportunities for strategic planning.
For example, if you
negotiate a settlement
in December 2024 but the credit card company doesn't process and finalize the forgiveness until January 2025, the tax impact would fall in the 2025 tax year, not 2024. This could be advantageous if you expect your income to be lower in 2025 or if you need more time to prepare for the potential tax bill.
The state you live in also matters. While federal tax rules apply nationwide, state taxes may treat forgiven debt differently. Some states follow federal tax treatment, while others have their own rules. Some states don't impose income tax at all, while others might offer more generous exclusions than federal law provides.
How to deal with it:
Request written confirmation of exactly when the debt will be forgiven. If possible, time your debt forgiveness process strategically to align with years when your income might be lower. You should also research your state's specific rules regarding canceled debt or consult with a tax professional familiar with your state's tax code to maximize tax advantages.
Credit card debt relief can provide much-needed breathing room in your finances, but it's important to be aware of the potential tax implications. If a portion of your debt is forgiven, you may owe taxes on that amount. To avoid surprises, review any Form 1099-C you receive, understand your potential obligations and consider consulting a tax professional to ensure you handle everything correctly. With the right knowledge and planning, you can move forward confidently and make the most of your debt relief efforts.
