Tax Topic

Cancelled Debt Income

If you have cancelled debt, meaning a creditor forgives any amount you owe to the creditor, that amount becomes taxable income to you. Given that cancelled debt generally happens only when you are in a tough financial situation, it can seem like insult to injury.

Cancelled debt can happen with any creditor, for example, a home mortgage, a HELOC, or a credit card. If a creditor does cancel some or all of the debt you have with the creditor, the creditor is supposed to issue a Form 1099-C to you with the details of the cancellation. Whether or not the form is issued, the cancelled debt amount is income to you in the year the debt is cancelled, and it's important that we deal with it on that year's tax return. In some limited cases, the cancelled debt income can be reported on the tax return, then excluded from taxable income using one of a very few exclusions, each of which is situation specific.

If you have cancelled debt, we will need to meet to discuss the details so that it can be properly reported on the tax return, and, hopefully, excluded from taxable income. This usually involves a face-to-face appointment given the complexity of the topic.

Here is a link on the IRS site on cancelled debt income: http://www.irs.gov/taxtopics/tc431.html

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