How do I report excludable (non-taxable) canceled debt?

by TurboTax•396• Updated 3 months ago

Generally, the IRS regards canceled, discharged, and forgiven debt as taxable income because the debtor received a benefit without paying for it. However, there are a few exceptions:

Debt discharged in a Title 11 bankruptcy (including chapters 7, 11, and 13).
Canceled debt on qualified farms and real business property.
Forgiven debt on a qualified principal residence if the forgiveness arrangement was entered into and in writing on or after January 1, 2007, and before January 1, 2021 (aka mortgage forgiveness debt relief).
Debt canceled due to insolvency.
- To qualify, you must demonstrate that your total debt exceeded the fair market value of all of your assets immediately before the cancelation occurred.
- Use the Insolvency Worksheet in IRS Publication 4681 to figure out if you were insolvent at the time of the debt cancelation.

Entering forgiven debt on a qualified personal residence

You should have received a 1099-C from your mortgage company. After you enter the info from it, we'll determine if the forgiven debt qualifies for the exclusion. If it does, we'll also fill out Form 982 as part of your return.

Open or continue your return.
Go to 1099-C.
- If you see a prompt to upgrade to Deluxe and you're using the online or mobile version, follow those instructions.
Select the first option on the Tell us about your canceled debt screen and then select the transaction type. Select Continue.
Keep following the onscreen instructions, answering questions as you go. After a few screens, you should get the Good News! screen if the forgiven debt qualifies for the exclusion.

Entering other types of excludable canceled debt

The IRS has strict guidelines for canceled debt not directly related to the purchase of a main home. We recommend consulting with a tax professional and/or familiarizing yourself with the sections in IRS Publication 4681 that relate to your situation before proceeding further.

Note: If you're using an online or mobile version of TurboTax, you'll need to switch to the Desktop software so you can follow these instructions.

With your return open in the TurboTax Desktop software, select the Forms icon or select it from the View menu. This will put you into Forms mode.
Select Open Form (in the left pane on Windows, in the top menu on Mac) and type in 1099-C.
Select Form 1099-C: Cancelation of Debt and Open Form.
Enter the name of the creditor and then select Add Form.
Type in the info from your paper 1099-C.
Now go back to the left pane and open Canceled Debt (X) (X is your 1099-C creditor).
Scroll down until you reach the part that pertains to your situation (Parts III through XI). There are nine parts but you only need to fill out the one that applies to you.
- If you're filling out Part VIII (Exclusion for Insolvency) you must also select the QuickZoom button so you can fill out the Statement of Insolvency.
Next, select Form 982 in the left pane (skip steps 8 and 9 if your debt was canceled due to insolvency or bankruptcy).
Complete Part II (Reduction of Tax Attributes) on Form 982.
Now select Schedule 1 in the left pane to verify that your debt has been excluded. There should be no canceled debt income on Line 8.
Finally, select the Step-by-Step button at the top to go back to interview mode.