With the recent economic downturn experienced by many taxpayers, there is a tax concept that is very important: cancellation of debt. You would think that the cancellation of debt by a credit card company or mortgage company would be a good thing for the taxpayer. And it can be, but it can also be considered taxable income by the IRS. Here is a quick review of various debt cancellation situations.
- Consumer debt. If you have gone through some type of credit “workout” program on consumer debt, it’s likely that some of your debt has been cancelled.
- If that is the case, be prepared to receive IRS Form 1099-C representing the amount of debt cancelled. The IRS considers that amount taxable income to you, and they expect to see it reported on your tax return.
- The exception is if you file for bankruptcy. With bankruptcy, generally the debt cancelled is not taxable.
- Even if you are not legally bankrupt, you might be technically insolvent (where your liabilities exceed your assets).
- If this is the case, you can exclude your debt cancellation income by reporting your financial condition and filing IRS Form 982 with your tax return.
Come back to the Atlanta-based tax attorney blog this week to read Part Two of ‘Cancelled Debt Can Result In Taxable Income’.