Excluding Forgiven Credit Card Debt from Taxable Income

If you had delinquent credit card accounts and negotiated a lower payoff amount, you are not necessarily in the clear. The portion of the debt that was forgiven may be reported as taxable income. There are a few ways of excluding forgiven credit card debt from taxable income.

Excluding Forgiven Credit Card Debt from Taxable Income

You may be able to exclude forgiven credit card debt as income if you fall into one of two categories. First, those who file Chapter 11 bankruptcy will not be taxed. Secondly, if you were considered insolvent (see definition below) at the time of the cancellation, you also qualify for the exclusion.

Definition of Insolvency

You are considered insolvent when the total amount of your debt is more than what your total assets are worth. Assets are essentially everything you own, like your home, car, stocks, expensive items such as jewelry and furniture, and even retirement accounts, pensions and life insurance policies. For some examples of insolvency, you can refer to the IRS Publication 4681 (

Reporting Insolvency

If you would like to report insolvency and exclude forgiven credit card debt from taxable income, you must use Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) as well as Section 1082 Basis Adjustment, and attach it to your Federal income tax return. Just check box 1b and on line 2, include either the amount of debt cancelled or the amount that you were insolvent, whichever is smaller. In Part II, you must also decrease your tax attributes.

Summary & Disclaimer

If you have forgiven credit card debt, you may receive a form 1099-C that reports the amount as part of your income for the year. If you filed Chapter 11 bankruptcy or were considered insolvent, speak to your accountant about excluding forgiven credit card debt from taxable income. Keep in mind that special tax forms are required to do this. You would not simply leave off the amount from your tax returns. The above information should not be considered legal or accounting advice. As with any tax-related matters, it is important that you speak with a tax professional for information about your particular situation.