Is canceled, forgiven, or discharged debt taxable?
Most likely. Canceled, forgiven, or discharged debt is considered taxable income unless it qualifies for either an exclusion or an exception.
Debt that qualifies for an exclusion
Cancelation of qualified principal residence indebtedness (aka mortgage debt relief). In this scenario, TurboTax will complete Form 982 and include it with your return
Debt canceled under Title 11 bankruptcies*
Debt (the amount exceeding your assets) canceled during insolvency*
Cancelation of qualified farm or real property indebtedness*
*You can report this type of excludable debt in the TurboTax Desktop software; it's not supported in TurboTax Online or the mobile app. Due to the complexity of this topic, we recommend consulting a tax professional. Also see IRS Publication 4681 for more info.
Debt that qualifies for an exception
Certain qualified student loans
Money excluded from income by law, such as gifts or bequests
Canceled 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
Normally debt is reported on Form 1099-C. However, if you get a 1099-C for debt that a creditor is still trying to collect, don't report it on your taxes. Uncollected debt isn't considered canceled, forgiven, or discharged, which means there's nothing to report, at least not yet.
