Limitations on Writing Off Credit Card Debt
- The IRS allows borrowers to deduct the amount of interest charged through the year only on qualifying loans, which for most individual taxpayers only includes interest on a mortgage for your principal residence and interest that accrues on investment income. Personal debt -- such as credit card debt and automotive and personal loans -- can't be used as a tax write-off, regardless of the amount of interest you accrue over a year. The IRS hasn't allowed taxpayers to write of credit-card interest charges since 1987.
- That doesn't mean you're entirely stuck with your credit card interest charges. If you're a homeowner and take out a home equity loan to repay your credit card debt, you're getting more than the convenience of a single payment and typically lower interest rates: Because loans taken against equity in a house qualify as principal-residence debt, the IRS allows you to treat that interest as if it were for a traditional mortgage, using the year's interest as a deduction. You'll only be able to take advantage of this deduction if you're able to claim enough itemized deductions to exceed the amount allowed by the standard deduction, which is $5,700 for an individual filer for the 2010 tax year.
- If you entered a debt-forgiveness agreement with a credit card company that wrote off a portion or all of your debt, you face income taxes on the forgiven amount. Because this transaction is essentially the same as your creditor writing you a check for the amount of the forgiven debt, it's treated as pure income. Your lender will issue a 1099 that reports the forgiven debt, which must be reported on your 1040. Certain types of forgiven debt -- debt covered bankruptcy proceedings, farm debt and non-recourse loans -- aren't taxable, although arrangements with credit card companies don't fall under these exemptions.
- If you emerged from Chapter 7 or Chapter 11 proceedings during the latest tax year, all credit card debt that was written off as part of bankruptcy proceedings is completely forgiven in the eyes of the IRS. Taxpayers who complete Chapter 7 and 11 protection are treated as entirely fresh tax entities, and credit-card debt written off during this process, the amount of which is determined by bankruptcy court, is eliminated from your tax basis.
