As I wrote a week ago, in general, if you borrow money and you are legally obligated to repay that debt at a future date, and if that debt is forgiven in full or in part, the cancelled debt becomes taxable income to you. I also discussed Amounts that could be excluded from Gross Income. Today, we will cover Exceptions to Cancellation of Debt Income. If a cancellation of Debt Income meets the requirements as an Exception, the amounts are not included in the Gross Income of the Taxpayer.
Exceptions to Cancellation of Debt Income
IRS Tax Topic Number 431 identifies the following as Exceptions to the Requirement of Debt Income:
- Amounts that are Cancelled as gifts, bequest, devises, or inheritances.
- Certain qualified student loans cancelled under special loan provisions that require certain services being rendered by the Taxpayer.
- Certain Education or loan forgiveness programs to help provide health services in certain areas.
- Amount of cancelled debt that would be deductible if the taxpayer could deduct it if paid as a cash basis taxpayer. For example, the interest portion of debt.
- A qualified purchase price reduction given by the seller of property to the buyer.
- Any Pay-for-Performance Success Payments that reduce the principal balance of your home mortgage program under the Federal Governments HAMP program.
- Amounts from student loan discharged on the account of death or total and permanent disability of the student.
How is Canceled Debt Excluded from Income?
With Exceptions, it’s very simple, they’re not included on the tax return. Also, unlike with Exclusions, there is no requirement to also reduce certain tax attributes for the same amount.
Do You Need Help?
If you have had debt forgiven and are need help with understanding the tax consequences, 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 email@example.com.