Patrice
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Deductions & credits

Possibly, According to the IRS, if a debt is canceled, forgiven or discharged, you must include the canceled amount in your gross income, and pay taxes on that “income,” unless you qualify for an exclusion or exception. Creditors who forgive $600 or more are required to file Form 1099-C with the IRS.

Cancelled, forgiven, and discharged debt is considered taxable income, unless it qualifies for an exclusion or an exception.

Normally the debt is reported on Form 1099-C. Make sure you enter your 1099-C in TurboTax even if it qualifies for an exclusion or an exception.

Exclusions

  • Cancellation of qualified principal residence indebtedness, better known as mortgage debt relief;
  • Debt cancelled in a Title 11 bankruptcy;
  • Debt cancelled during insolvency (the amount exceeding your assets);
  • Cancellation of qualified farm or real property indebtedness.

If the debt qualifies for any of these exclusions, TurboTax will complete Form 982 and include it with your return.

Exceptions

  • Certain qualified student loans;
  • Money excluded from income by law, such as gifts or bequests;
  • Cancelled debt that if paid by a cash-basis taxpayer would otherwise be deductible;
  • A qualified purchase price reduction given by a seller;
  • Any Pay-for-Performance Success Payments that reduce the principal balance of your mortgage under the Home Affordable Modification Program.

Tip: If your creditor is still trying to collect on your debt, it's not considered cancelled, forgiven, or discharged. There is no taxable income to report, not even if you got a 1099-C from the creditor.

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