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Cancellation of debt is considered income to you by the IRS. The reason for this is: if you borrow money or make purchases and then don't have to repay the debt, you have taxable gain. The credit card company will send you a 1099-C after the end of the tax year that will show the amount of debt that was forgiven. They will also send a copy of the 1099-C to the IRS so they will be looking for the debt cancellation on your tax return. You don't actually file the 1099-C with your return, but the income must be included as "other income" on the 1040 unless you qualify for one the exceptions.
There are 5 exceptions to the general rule that cancellation of debt is taxable. Only 2 of the exclusions apply to credit card debt. They are: 1) if you are in bankruptcy at the time the debt is canceled, the cancellation of debt income is not taxable. 2) If you are insolvent immediately before the debt is canceled, it is not taxable to the extent of insolvency. Insolvency means that your debts exceed your assets.
If one of the exceptions apply to you, you must report the amount of cancellation of debt income on form 982 to claim the exception and attach form 982 to your return.
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