You probably know that if you borrow money, and you are legally obligated to repay that debt at a future date, and the debt is either forgiven in full or in part by the lender, the amount of cancelled debt must be reported as income on your tax return. However, did you know that there are situations where the law allows you to exclude the amount from your gross income? There are many taxpayers who come into our Richardson Texas office that are not aware of those potential exclusions.
When debt is canceled, the lender may send a Form 1099-C that identifies the amount and date of cancellation among other things. The taxpayer is required to report the amount of cancelled debt as Other Income on Form 1040.
When Canceled Debt is excluded from Income
This article will discuss amounts of Canceled Debt excluded from income. There are also situations when canceled debt is not considered income such as when canceled as a gift. When Canceled Debt meeting the requirements for exclusion, they will not be taxable.
IRS Tax Topic 431 list the following as Exclusions From Gross Income
- Debt canceled in a Title 11 bankruptcy case
- Debt canceled during insolvency
- Cancellation of qualified farm indebtedness
- Cancellation of qualified real property business indebtedness
- Cancellation of qualified principal residence indebtedness that is discharged subject to an arrangement that is entered into and evidenced in writing before January 1, 2018.
How is Canceled Debt Excluded from Income
The Taxpayer will complete Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) to their Form 1040 when filing. The amount of debt excluded will flow to Form 1040 and the result will be that no income tax will be owed on the excluded amount.
Do You Need Help?
If you’ve had received a Form 1099-C that you believe may be excludable from income and need assistance with that problem, or if you need help with any other IRS or tax matter, we’d like to help. Please give me a call at (972) 821-1991 or email me at bob@jablonskyandassociates.