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:
The exclusions are:
- Cancellation of qualified principal residence indebtedness, better known as mortgage debt relief;
- Debt cancelled in a Title 11 bankruptcy;
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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. You can not import Form 982 from the IRS. Please see the information below.
Important. If you are reporting any type of debt cancellation other than qualified principal residence exclusion that TurboTax handles, we generally recommend using the CD/Download version of TurboTax Deluxe or a higher edition. Under these circumstances, Form 982 entries will need to be made manually in Forms view.
If your canceled debt isn’t directly related to the purchase of a main home, the IRS has strict guidelines for determining how to report it. There are several options specific to each taxpayer’s situation. To determine which apply to you, we recommend you consult a tax professional or see IRS Publication 4681 or Publication 544.
