I have $12,000 in credit card debt. I am looking to settle for about $6,000 to $7,000 with two different companies. I know that the $5,000 to $6,000 in relief is considered taxable income by the IRS. Can you tell me what rate this will be taxed at? I ear about $48,000 in taxable income a year and have a wife that doesn't work and I also have 3 kids.

ANSWER

The BIDaWIZ Team's Answer:

You are correct that you will owe taxes on the credit card debt that is forgiven by the lender since you are not declaring bankruptcy. The two lenders will issue you a 1099-C form. The $5,000 to $6,000 in relief will be added to your taxable income for the 2014 tax year. Your total income will be $53,000 to $54,000. However, your adjusted gross income will be less as we assume you'll be claiming 4 dependents. You're technically in the 15% ordinary income tax bracket, which translates to $900 in taxes, but the dependents you claim will lower that amount to around $600. The other point to note is that you will be subject to states taxes as well on this income. NC state tax for this income is between 6% and 7%. Thus, the state tax will likely be around $400. We referenced IRS publication 4681 and IRC Section 108.