Cancellation of Debt - 1099C

In the past few years due to the economic troubles, many distressed taxpayers have had some or all of debt cancelled or forgiven. This can be through a foreclosure on a home, accounts written off, credit card or other loans from financial institutions. While this can be a relief to those who have received it, many do not understand the tax consequences.

 

The IRS considers as income amounts over $600 shown on the 1099C with some exceptions:

• Cancellation of debt by a private lender, such as a relative or friend which is considered as a gift
• Certain student loans.
• Cancellation from deductible debt that which could have been included on the Schedule A (home mortgage interest).

The IRS tax laws include income from the discharge of indebtedness in gross income.

There are exclusions from the canceled debt that are considered income:

• Discharge of debt through bankruptcy
• Discharge of debt of an insolvent taxpayer
• Discharge of qualified farm debt
• Discharge of qualified real property business debt and
• Discharge of qualified principal residence

A taxpayer is considered insolvent when liabilities exceed the fair market value of assets. However, you cannot exclude any amount of cancelled debt that is greater than the amount you are insolvent.

Excluding the discharge of debt through bankruptcy (unless the debt was for business or investment purposes) the income still must be reported on the return but form 982 can be filled out for the exclusion. Failure to do this will result in the IRS considering the cancellation of debt income. 

These exclusions can be complicated and detailed especially in the reporting of them in the preparing of the tax return. It is best to consult a tax professional when dealing with these issues. 

K&K Tax Group is a national tax resolution firm comprised of experienced tax attorneys, enrolled agents and tax relief professionals practicing as Tax Resolution Specialists certified by the American Society of Tax Problem Solvers (ASTPS). This is what makes us uniquely qualified to successfully solve IRS problems day in and day out. Our licensed professionals (every tax attorney, CPA and enrolled agent) must meet educational, experience and examination requirements prescribed by the ASTPS, a national, not-for-profit professional organization.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

K&K Tax Group

(877) 395-0304

www.kktaxgroup.com