Cancellation of debt income is the “gain” you receive when a debt you are responsible for is forgiven. The amount you don’t have to pay back may be considered cancellation of debt income, which could be taxable income in some cases.
Form 1099-C
You may receive a Form 1099-C in the mail if you have cancellation of debt income. Even if you don’t receive a 1099-C, you may still have cancellation of debt income that you need to report on your tax return.
If you don’t report the income from the 1099-C, the IRS may end up conducting a tax audit, adjusting your return, and charging you penalties, interest, and back taxes. So make sure you know how to report this income properly.
Exceptions to Cancellation of Debt Income
Various exceptions exist that allow debt to be forgiven without any tax consequences. Some of these exceptions include:
- Amounts canceled as gifts, bequests, devises, or inheritances.
- Student loan debt that is forgiven after the debtor works for a certain period of time in a certain profession, such as public service loan forgiveness programs.
- Amounts of canceled debt that would be deductible if you, as a cash basis taxpayer, paid it.
- Student loans discharged due to death or total and permanent disability of the student.
- Qualified purchase price reductions given by a seller.
- Pay-for-Performance Success Payments that lower the principal on your mortgage under the Home Affordable Modification Program.
Any of these amounts are not considered cancellation of debt income.
Exclusions to Cancellation of Debt Income
Exclusions are considered cancellation of debt income but won’t be included in your taxable income. The following amounts may qualify for an exclusion from income:
- Debt canceled in a Title 11 bankruptcy
- Debt canceled during insolvency
- Cancellation of qualified farm indebtedness
- Cancellation of qualified real property business indebtedness
- Cancellation of qualified principal residence indebtedness before January 1, 2018
Talk to a tax professional if you aren’t sure how to report your cancellation of debt income on your tax return.
If you didn’t report your cancellation of debt properly, you may receive a notice from the IRS because they received a Form 1099-C from your lender. Contact a tax attorney to discuss the best course of action for resolving your tax debt.
The Gartzman Law Firm offers tax settlement help for both federal and state tax debt. Use our contact form to request a consultation with an Atlanta tax resolution attorney.