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.