Wednesday, June 17
Posted 9 a.m. EDT
A New York Times story on how credit card companies are "settling delinquent accounts for substantially less than the amount owed" caught my eye.
I don't really care about the credit card issues; that's for my colleagues Ellen Cannon and Leslie McFadden to discuss on Plastic Rap.
What did catch my eye was what isn't in the story. There's no mention of the tax bills that await credit card customers who see a chunk of their card bills forgiven.
Yep, as I noted in a previous Bankrate story, one of life's terrible tax surprises is that the IRS considers forgiven debt as taxable income.
The guy who's the main example in the Times story was able to get his credit card bill cut in half. But going from more than $5,000 owed to paying half that -- $2,743-- means he's liable for the taxes on the forgiven amount.
If he's in the 25 percent tax bracket, that means he'll owe the IRS $685.75.
OK. I'll concede that less than $700 is much better than almost $5,000. But I'll bet he doesn't know that he's going to have a bigger tax bill come next April 15.
Most people aren't aware of this nasty little tax quirk.
A lot of them think that forgiven debt is tax-free. That misperception got a boost when the Mortgage Debt Forgiveness Act of 2007 became law. Under the measure, which subsequently was expanded, some homeowners who are granted forgiveness of mortgage debt don't have to pay taxes on that amount.
But there are some restrictions to the measure.
And it applies only to debt canceled in connection with your home, not your credit cards.
So if you can get your Visa or Mastercard or whatever credit card company to cut your bill, good for you. But know that you'll have a new creditor in its place: the IRS.