Determining Whether Your Canceled Debt is Taxable
Free of Debt to Everyone but the Taxman
Sometimes we get lucky and that big balance we owe is written off by a forgiving creditor or waived through a sophisticated legal process with the help of a tax attorney.
But when your debt gets cancelled, it’s considered the same thing as receiving income in the amount of that balance. Some exceptions apply, but if your debt gets cancelled make sure to follow the IRS’ rules.
When your debt gets cancelled you’ll receive IRS Form 1099-C. Make sure to include the canceled amount in gross income, and if the creditor is still trying to collect after you receive your 1099-C the debt has not been cancelled and including it in your income isn’t necessary yet. Some canceled debt that isn’t taxable include:
- Debt cancelled during insolvency
- Title 11 bankruptcy debt cancellation
- Cancellation of certain qualified student loans
- Amounts legally excluded from income like gifts or bequests
- A seller giving a qualified purchase price reduction
Also, if your debt was secured by property that was taken by the lender to fully or partially satisfy your debt, it’s considered the same as you selling it and you may have a gain or loss to report to the IRS.
While you may be able to cancel some of your private debt, the IRS isn’t so forgiving. Most taxpayers who owe the IRS back tax debt at some point have a wage garnishment or tax lien leveled against them, and the tax debt itself will continue to grow through penalties and interest. But hiring a tax attorney can help you take advantage of numerours IRS programs to resolve your tax debt affordably, which is good news if you owe.