Milton is experiencing cash flow problems during the current year. He owes $12,000 on his credit card. The credit card company agrees to reduce the debt to $9,000. Prior to the debt reduction, Milton's total assets were $40,000 and his total liabilities were $39,000. How much income must Milton recognize from the reduction of his credit card balance?

Question

Quizplus · Accepted Answer

Milton must recognize $3,000 as income from the reduction of his credit card balance. This is because when a creditor forgives a portion of the debt, the amount forgiven is considered income by the IRS and must be included in the debtor's income tax return. In this case, the credit card company reduced Milton's debt by $3,000 ($12,000 - $9,000), which is the amount he must recognize as income.

Milton Is Experiencing Cash Flow Problems During the Current Year