Final answer:
Jennifer must indeed include the $4,500 settlement as part of her gross income according to the IRS rules, as it is considered canceled debt which is typically taxable.
Step-by-step explanation:
The question concerns whether or not Jennifer must include the settled debt amount in her gross income. The answer to whether Jennifer has to include the $4,500 settlement in her gross income is true. According to the IRS, if a debt is forgiven or discharged for less than the amount you owe, the debt is considered canceled in the amount that you do not pay. The canceled debt is typically taxable and must be reported as income on your tax return. There are exceptions, but the question does not provide information to indicate that any would apply to Jennifer.
Comparing this to an example involving credit card debt and mental accounting, consider a person with a $1,000 credit card debt at a 15% yearly interest cost and a $2,000 savings account earning 2% annually. If they only pay off the minimum of their credit card and do not use their savings to pay off debt, they are effectively losing money. The rational decision economically would be to use the savings to pay off the credit card debt to avoid the higher interest rate and minimize financial loss.