A taxpayer recently settled a large credit card debt with his lender. The question he then asked is “Do I need to declare the canceled debt as “income” on my tax return. The short answer is yes, but there are exceptions.
A bank or other lending institution that cancels debt of $600 or more, will issue a 1099-C to the taxpayer. Taxpayers who have canceled debt amounting to less than $600 must still report the cancellation as income. Depending on the type of debt, the taxpayer must report the canceled debt on Form 1040, Schedule 1, Schedule C, or Schedule F.
As with most tax rules, certain exceptions apply. The following types of canceled debt are generally not taxable
1) Any cancelled debt intended as a gift to the taxpayer
2) Cancellation of certain student loan debt[3]
3) Debt forgiven as part of a bequest (post-death gift)
4) Debt discharged as part of Title 11 bankruptcy proceedings
5) Certain qualified indebtedness discharged for a personal residence
6) Certain qualified discharged farm indebtedness
7) Other less common exception listed in 26 U.S.C. Sec 108(a)
A taxpayer who’s canceled debt is excluded from gross income should file form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) with their annual return. An experienced tax preparer can assist in identifying exceptions to canceled debt liability and complete an accurate and timely form 982.
While canceled debts can be financially beneficial to the taxpayer, in most cases the benefit must be reported to the I.R.S. as income. Keep your eyes open for form 1099-C in your mailbox. Then consult with a qualified tax professional who can help identify any exceptions that may apply to your individual situation. There is no patriotic duty to pay the I.R.S. more money than the law requires. The professionals at Heritage Income Tax can assist with the timely, accurate and secure filing of your annual tax return(s)—an
The author, Bryan Corcoran, Esq, is a retired Marine Judge Advocate. He earned his J.D. and Masters in Taxation from the University of Akron in 1997. He is currently a Tax Analysts for Heritage Income Tax. The views expressed in this paper are his own, and are not intended as a substitute for professional tax planning or legal advice.
See I.R.S. Pub 525, p. 20
26 U.S.C. Sec 108(f)
26 U.S.C. Sec 108(a)(1)(A)