Do you want lots of nice things? Do you lack the money to pay for those nice things? Well, don’t let that stop you. This is America, dammit, and our founding fathers invented credit cards specifically so we can have all the food processors, motorbikes, and throw pillows we want without actually having the means to pay for them.
That’s not to say the banks won’t expect you to pay for them, of course, and charge you a near-criminal rate of interest until you do. But you can’t get blood from a stone, and if one enterprising Congressman has his way, not only will we be able to walk away from credit card debt we can’t pay, we’ll soon be able to do so without any tax implications.
Ah, that’s right…the tax implications. Generally, if you can’t pay a debt, the lender may forgive some or all of the amount due. And while to you, the forgiveness may feel like you’re simply being returned to your pre-borrowing state, in the eyes of the tax law, you have undoubtedly been enriched.
Think of it this way…
Your buddy loans you $100. At the time, while you may feel like you’ve been enriched, you really haven’t, because your $100 increase in wealth has been offset by a $100 obligation to repay your buddy.
Should your friend tap you on the shoulder a few weeks later and say, “Hey, remember that $100 I loaned you…keep it…I’ve seen the way you live…” well, then things have changed. Even though you received the cash some time ago, it is at the moment your buddy removes your obligation to repay him that you have been enriched to the tune of the $100.
And under Section 61 of the tax law, all forms of wealth enrichment, unless specifically exempted by statute, are treated as taxable income. Specifically, Section 61(a)(12) — which builds on the seminal case in the area, Kirby Lumber — provides that as a general rule, when a taxpayer is forgiven of an obligation to repay a debt, he or she must recognize the amount of the debt forgiveness as taxable income. So in the example above, while it’s awfully nice of your friend to tell you to keep the $100, he has now created $100 of taxable income for you that you are required to report on your tax return.
The post Put It On The Card! Congressman Proposes To Make Credit Card Debt Forgiveness Tax Free appeared first on Liberty Investor™.
