What is debt cancellation? If you borrow money from a lender and the lender later forgives the debt, you may have to include the cancelled amount in income for tax purposes. When you borrow money from a lender you are not required to include the amount you borrowed in income because you are obligated to repay the loan. If the lender later forgives your obligation to repay the debt you may have to include the loan proceeds in income because you are not required to repay the lender.
Cancellation of Debt income is not always taxable, there are a few exceptions.
Bankruptcy: If you have debts that are discharged through bankruptcy these are not considered taxable income.
Principal Residence Indebtedness: Under the Mortgage Debt Relief Act of 2007 you may be able to exclude cancelled debt from mortgage restructuring or foreclosure on your principal residence. This applies to indebtedness forgiven in 2007 through 2014.
Insolvency: If your total debts are more than the fair market value of your assets you may be considered insolvent. Some or all of the cancelled debt may not be taxable if you were insolvent when your debt was cancelled.
Farm Debt: If the past three years more than half of you income was from farming, the loan was from an agency regularly engaged in lending and you incurred the debt directly from the operation of the farm, the income may not be taxable.
If a lender forgives a debt of more than $600 they should report the amount of cancelled debt to the IRS and to you on a Form 1099-C. If you have received a 1099-C it is important that you take this document seriously, as it could have a large impact on the amount of tax that you owe. It is important if you receive a Form 1099-C that you have someone trained in tax matters review your tax documents in order to determine if the cancelled debt must to be included in your income.
Here at Victory Tax Solutions we have tax attorneys that understand the ins-and-outs of debt cancellation and how it can impact your tax liability. Make the right choice, allow the professionals at Victory Tax Solutions to prepare your Federal and State tax returns accurately.
Call Victory Tax Solutions to speak with one of our account executives today. The call is toll free 1-877-772-0123.