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Visa May Forgive, But the IRS Never Forgets

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Did Visa, Mastercard, or American Express cut you a break last year and forgive over $600 in credit card debt?

If so, the IRS wants its share.

Share of what? There's nothing tangible there. "Forgiven" means "forgotten," doesn't it?

Not to the good people at 10th St & Pennsylvania Ave, it doesn't.

"Most people don't pay attention to the tax consequences when they are settling their debt," says Bill Hardekopf, CEO of and author of The Credit Card Guidebook. "They are just trying to figure out how to survive. The additional tax bill is usually an unwelcome surprise."

According to Hardekopf, the IRS "views forgiven debt greater than $600 as taxable income and expects you to pay taxes on that

You won't be able to slip under the radar, either--your creditor files a 1099-C with the IRS, so the government already knows the amount of your settlement.

Hardekopf says there are a few exceptions:

* Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.

* Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets. Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify.

* Non-recourse loans: A non-recourse loan is a loan for which the lender's only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.

Hardekopf says "But I didn't know," won't cut it with the IRS. Then again, not many things do. Except, perhaps, "How much do you want and when do you want it?"
POSITION:  No positions in stocks mentioned.