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Richardson TX - When Forgiven Debt Can Be Excluded From Income
In general, if you borrow money and you are legally obligated to repay that debt at a future date, if that debt is forgiven in full or in part, the cancelled debt becomes income to you. However, there are situations that tax law permits you to exclude the income from your tax return. Did you know that? If not, neither do most of the taxpayers who come from our Richardson, TX tax office.
When debt is forgiven, the lender of the debt will typically send a Form 1099-C to the taxpayer who had the forgiven debt. The taxpayer is then required to report the amount of the cancelled debt as Other Income on Form 1040.
When Canceled Debt is excluded from Income?
In a future blog, we will discuss when Cancelled Debt is and exception and is not considered income but today, we will discuss when and how to exclude income that is considered income. When Cancelled Debt meets the requirements for exclusion, all or part of the Cancelled Debt may be excluded from income.
IRS Tax Topic 431 list the following as Exclusions From Gross Income:
Debt canceled in a Title 11 bankruptcy case. Debt canceled during insolvency. We will cover ... more
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