Forgiven credit card debt leads to a big tax bill

It’s cool that Zooey Deschanel saves for retirement and some celebs love to discount shop

A recent report by the New York Federal Reserve Bank shed a sobering light on how much debt Americans will carry with them into the new year. 

It's interesting to watch some of the terms bandied about in headline news. For example, the LA Times headline reads S&P says student loan debt could be next financial bubble. Next? Could Be?

If you can't pay off your credit card debt, you can't afford your current lifestyle.Dear Liz: I have always carried more debt on credit cards than I should have. However, I have always been responsible in making payments. Before the economic crisis, my credit scores were around 780 and I had all the access to credit I needed. But my lenders have slashed my credit lines and closed accounts. Suddenly I find myself using 90% of my available credit, not because I'm spending more but because my credit lines have been reduced.

Since credit debt isn't exactly considered an income-booster, it's no wonder so many consumers forget how closely credit and taxes are intertwined.

Choices include cashing out a certificate of deposit, borrowing from a credit card or setting up a payment plan with the IRS.Dear Liz: Help! We've just received devastating news from our accountant that we owe around $11,000 to the IRS and the state for 2012 taxes. The reason for the huge bill is that we cleaned out my husband's IRA to pay for our son's college expenses. My husband is almost 65 and working part time after being laid off, and I'm 61 with a full-time job. What is the best way to pay this bill?

A reader asks whether she should focus on paying off debt, renovating her home or starting a small business.Dear Liz: I have read tons of books on finance and debt repayment, but I'm having trouble deciding what to do next. My husband and I are 52. He receives a monthly disability income, and I work two days a week. We still have about $105,000 left before our mortgage is paid off.

Dear Liz: I have $175,000 in credit card debt. Almost all of this debt was due to balance transfer offers over the years, which I managed quite well to make sure I had no balances with high interest rates.