CANCELLATION OF DEBT
When a debt is canceled, forgiven or discharged by a credit lender you will receive a 1099-C form reflecting the difference of the amount owed and how much the debt was settled for. You will have to report that amount as taxable income which must be shown on the Tax Return. Examples of 1099-C may include but not limited to: settlement of credit card debt, repossession, foreclosure, abandonment of property, return of property to lender and loan modification of primary residence.
Please click on the following link to view the IRS website regarding Cancellation of Debt.
IRS Website – Cancellation of Debt
There are certain exemptions that you may be eligible for to be applied to avoid taxation of the debt that was canceled.
Insolvency
If you can prove to the IRS that your debt (money you owe) outweighs your assets (savings, investments, property, etc.) you may be considered insolvent. You can only exclude cancellation of debt income to the extent that you are considered insolvent.
By applying this method you will not be taxed on the cancelled debt. Please fill out the Insolvency Worksheet provided below.
Insolvency Worksheet
Bankruptcy
If your debt was cancelled in conjunction with Title 11 bankruptcy proceeding Chapter 7 or Chapter 13, you are not responsible for taxes on the debt.
Student Loan Forgiveness, Usually Taxable, Is Tax-Free Under the Relief
Federal laws generally treat any forgiven student loan debt as a taxable event for the borrower, subject to a couple of exceptions, like for Public Service Loan Forgiveness, as well as disability discharges (until January 1, 2026). But in other cases, student loan forgiveness, like under an income-driven repayment plan, can result in a significant tax liability. Depending on your particular situation and how much debt was canceled, the taxable income could add hundreds or perhaps thousands of dollars onto your tax bill.
The American Rescue Plan Act makes student debt forgiveness tax-free until January 1, 2026. Significantly, the tax exemption under this law covers direct federal student loans, Federal Family Education Loans (FFELs), and private student loans.
Please click on the following link to view the IRS website regarding Cancellation of Debt.
IRS Website – Cancellation of Debt
There are certain exemptions that you may be eligible for to be applied to avoid taxation of the debt that was canceled.
Insolvency
If you can prove to the IRS that your debt (money you owe) outweighs your assets (savings, investments, property, etc.) you may be considered insolvent. You can only exclude cancellation of debt income to the extent that you are considered insolvent.
By applying this method you will not be taxed on the cancelled debt. Please fill out the Insolvency Worksheet provided below.
Insolvency Worksheet
Bankruptcy
If your debt was cancelled in conjunction with Title 11 bankruptcy proceeding Chapter 7 or Chapter 13, you are not responsible for taxes on the debt.
Student Loan Forgiveness, Usually Taxable, Is Tax-Free Under the Relief
Federal laws generally treat any forgiven student loan debt as a taxable event for the borrower, subject to a couple of exceptions, like for Public Service Loan Forgiveness, as well as disability discharges (until January 1, 2026). But in other cases, student loan forgiveness, like under an income-driven repayment plan, can result in a significant tax liability. Depending on your particular situation and how much debt was canceled, the taxable income could add hundreds or perhaps thousands of dollars onto your tax bill.
The American Rescue Plan Act makes student debt forgiveness tax-free until January 1, 2026. Significantly, the tax exemption under this law covers direct federal student loans, Federal Family Education Loans (FFELs), and private student loans.