This is clearly outside the scope of tax preparation software support. I would consult with your attorney who participated structuring your divorce settlement.
Please see the links below for additional information:
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.
To enter your 1099-C:
- Open (continue) your return, if it's not already open.
- In the TurboTax program, search for 1099-C or 1099C (lower-case also works) and then click or tap the "Jump to" link in the search results
- Select the type of cancelled debt (main home or other) and then click or tap Continue.
- If using Free Edition, follow the prompts to upgrade to Deluxe.
Follow the onscreen instructions to enter information from your 1099-C.
