In general, if you borrow money and you are legally obligated to repay that debt at a future date, if that debt is forgiven in full or in part, the cancelled debt becomes income to you. However, there are situations that tax law permits you to exclude the income from your tax return. Did you know that? If not, neither do most of the taxpayers who come from our Richardson, TX tax office.
When debt is forgiven, the lender of the debt will typically send a Form 1099-C to the taxpayer who had the forgiven debt. The taxpayer is then required to report the amount of the cancelled debt as Other Income on Form 1040.
When Canceled Debt is excluded from Income?
In a future blog, we will discuss when Cancelled Debt is and exception and is not considered income but today, we will discuss when and how to exclude income that is considered income. When Cancelled Debt meets the requirements for exclusion, all or part of the Cancelled Debt may be excluded from income.
IRS Tax Topic 431 list the following as Exclusions From Gross Income:
- Debt canceled in a Title 11 bankruptcy case.
- Debt canceled during insolvency. We will cover Insolvency in a future blog and it may impact all or part of the forgiven debt.
- 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. Generally, if you qualify to excluded cancelled debt from income, you must also reduce certain tax attributes for the same amount. Tax attributes include credits and carryovers, losses and carrovers, and the tax basis of the asset(s).
Do You Need Help?
If you’ve 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 [email protected].
