06 Sep Do I owe tax if my credit card debt is forgiven?

Q. I’ve heard there will be no taxes on debt forgiveness for student loans. How does it work for credit cards? If I negotiate with my card to take a lower amount to close out my account?
— Debtor

A. You’re correct about the student loans.

President Joe Biden enacted loan forgiveness for some student loan borrowers.

Under his plan, student loan borrowers who make less than $125,000 per year will have between $10,000 and $20,000 of federal student loan debt forgiven, depending on the kind of debt, said Karra Kingston, a bankruptcy attorney in Union City.

Under the plan, and because of a provision in the American Rescue Plan, this forgiven debt will not be taxed federally as income, Kingston said. New Jersey doesn’t tax forgiven debt, though 13 other states do.

Credit card debts are a little different, Kingston said.

“When you negotiate a credit card debt and end up paying less than the amount owed, the creditor will usually issue a 1099-c,” Kingston said. “This means that any forgiven debt that you settle, can be counted as income.”

For example, she said, if you have $10,000 of credit card debt and settle the account for $7,000, you would be taxed on $3,000 since that would be considered income, she said.

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This story was originally published on Sept. 6, 2022.

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