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How does credit card debt forgiveness impact your taxes?
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With persistent inflation and soaring interest rates dogging consumers in recent years, Americans now face over $1 trillion in credit card debt. The average American now owes around $8,000 in credit card debt.
That’s not an amount most households can repay quickly, especially if you carry a balance and must pay substantial interest rates. According to the Federal Reserve, the average credit card interest rate has skyrocketed from 16.45% in 2021 to its current rate of 22.76%. Even worse, a recent Consumer Financial Protection Bureau (CFPB) report found that 15 credit cards from nine of the largest issuers charge cardholders annual percentage rates (APRs) over 30%.
Unable to pay higher prices for everyday expenses, many Americans rely on credit cards to make ends meet.
Amid these circumstances, it shouldn’t be surprising that many cardholders struggle to keep up with their payments. To that end, 30-day delinquency rates hit 3.25% in the second quarter of 2024, rising for the 11th consecutive quarter.
If your credit card debt has reached a dangerous level, consider your options, including debt consolidation, a home equity loan and credit counseling. If you’ve already missed payments and you’re staring at bankruptcy or other more serious options, credit card debt forgiveness—or debt settlement—may make sense. These programs negotiate with your creditors on your behalf to lower your debt and help you tackle it better. Before proceeding, however, it’s essential to consider how credit card forgiveness could impact your taxes.
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How does credit card debt forgiveness impact your taxes?
Pursuing credit card forgiveness through a debt settlement service could help you reduce your debt by allowing you to pay only a portion of what you owe. Remember, however, that the IRS adds any forgiven debt to your income.
“There are limited exceptions, but most debt settlements are considered taxable,” says James Guarino, CPA and managing director at Baker Newman Noyes in Woburn, MA. “This means the portion of the debt forgiven is reported on your tax return as additional ordinary income, and it can be subject to federal income tax at rates ranging from 10% to 37% for 2024, depending on one’s tax bracket.”
The amount you could owe the IRS for credit card forgiveness depends on your tax bracket. The higher your tax bracket, the more you will pay for any forgiven debt. For example, if you get a $10,000 debt settlement, and your income places you in the 20% tax bracket, you would owe $2,000 in federal taxes on your forgiven debt.
If you’re considering tackling your credit card debt through a settlement, you’ll need to report it and prepare for the tax bill ahead of time. “You should be ready to report any debt that is forgiven during tax season,” says Alex Beene, a financial literacy instructor at the University of Tennessee at Martin. “This will normally come in the form of a 1099-C from the institution that has forgiven the debt. This is one of the biggest mistakes I’ve seen some make. They don’t prepare for this, and as a result, they find themselves with a larger tax bill and an inability to pay it.”
Prepare for this inevitability with a top debt relief servicer now.
Who should consider credit card forgiveness?
Debt settlement offers a potential option to reduce your credit card debt, which could ease the strain on your budget. But, like bankruptcy, this option should be taken seriously as it could negatively affect your credit score.
As Melissa A. Caro, CFP and founder of My Retirement Network in New York City, notes, “Debt settlement is a last resort after exploring alternatives like debt consolidation, credit counseling or negotiating directly with creditors. But if you have a significant amount of unsecured debt—such as credit cards—can’t meet minimum payments and would even be potentially facing bankruptcy, then settlement can have a less severe impact on your credit score and financial future than declaring bankruptcy. However, it will still damage your credit score and may not eliminate the entire debt.”
The bottom line
If you decide to pursue credit card forgiveness through a debt settlement, be prepared to pay the income taxes. “If you are facing an additional tax burden from debt settlement, the two most important factors are to document every piece of paperwork in your forgiveness process and meet with a tax advisor to assess what your payments will look like and how to best pay them back,” says Beene.
If you’re concerned your credit card debt might be unsurmountable, explore all of your options, including debt consolidation loans and 0% balance transfer credit cards. However, if you don’t correct the behaviors that led to the debt, you could end up with more debt, making the problem worse. It’s also wise to consider working with a credit counselor who can help you set up a plan to pay off your debt.
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Long before comic book characters dominated movie screens, actor Christopher Reeve made the world believes in superheroes with the 1978 classic “Superman.”
Reeve died in 2004, nearly a decade after an accident re-shaped his life. “Super/Man: The Christopher Reeve Story” is using interviews with family and friends and never-before-seen home videos to explore his real-life heroism.
Reeve started his career on the stage, studying at the prestigious Juilliard School and living with comedian Robin Williams. The pair had a friendship that was “more like a brotherhood,” said Reeve’s son Matthew. Reeve was in awe of Williams’ energy and versatility, Matthew Reeve said, but audiences quickly clued into Reeve’s own star power when he took on the role of the Man of Steel.
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To his children, though, he “was just dad,” Matthew Reeve said. The documentary explores how Matthew Reeve and his sister Alexandra Reeve Givens grew up watching their dad take the stage as Superman. “Super/Man” also reveals their heartbreak over their parents’ breakup and the joy they found when Reeve re-married. He tied the knot with Dana Reeve in 1992, and the pair welcomed another child, William Reeve, later that year.
“Dana was sunshine,” Alexandra Reeve Givens recalled. “She just brought joy with her wherever she was and could find it even in the darkest moments.”
Those dark moments came suddenly, when in 1995, a near-fatal horseback riding accident left Reeve paralyzed from the neck down. The documentary allows viewers to see, for the first time, what went on out of the public’s view. Reeve can be heard talking about how he “ruined (his) life and everybody else’s,” but in a touching moment, old friend Robin Williams is seen visiting him in the hospital.
“Robin showed him ‘Hey, you’re still you,'” Alexandra Reeve Givens said. “‘You still have this foundation of friendship and people around you, who adore you. And you’re going to find those fun moments in life again.'”
That support from friends and family re-ignited Reeve’s legacy of activism. He made appearances at the Democratic National Convention and the 68th Academy Awards in 1996, about a year after the accident. Matthew Reeve said watching his father address his industry peers at the Oscars was “one of (his) most proud moments.”
“It was just a production for him to get out of bed every morning, let alone get across the country and go out in public for the first time,” Matthew Reeve said. “It was a big deal. It was a big deal to him, but it was also a big deal to the entire disability community. We stayed up in London till like three in the morning to watch that live. It’s a fond memory.”
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Reeve also went on to launch what would become the Christopher and Dana Reeve Foundation, which is dedicated to advancing research into spiral cord injury and help individuals and families impacted by paralysis. It was his dad’s mission to find a cure, Matthew Reeve said, while his stepmother wanted to focus on improving the lives of paralyzed people and their families. The foundation and Reeve’s platform helped bring unprecedented attention and funding to spinal cord injury research.
Reeve even kept acting and realized his lifelong dream of directing with the 1997 HBO movie “In the Gloaming.” Reeve died in 2004 from heart failure at 52.
“There is a huge amount of great actors and actresses out there, where their filmography might be amazing and what they achieve on a cultural level might be amazing, but have they actually achieved anything really as a human that moves the needle for our society?” said filmmaker Ian Bonhote, who made the documentary with Peter Ettedgui. “And Chris has done both things.”
“Super/Man: The Christopher Reeve Story” will open in theaters on Friday, Oct. 11.
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