global Tax Is Canceled Debt Taxable? October 25, 2016 Canceled debt happens when a creditor agrees to cancel a debt obligation without actually being repaid the full amount owed. So...how do taxes fit into this equation exactly? Do you have debts that have been forgiven or discharged? If your debt is pardoned or discharged in an amount less than what you owe, the debt is considered canceled. The question is...is this debt taxable? When does cancelation of debt occur? If a creditor cannot collect or gives up on collecting your debt(s), he/she may cancel the debt. Cancelation of debt might also occur in light of a foreclosure, repossession, voluntary transfer of the property to the lender, abandonment of the property or mortgage modification. So...is the debt taxable? If your debt is canceled, forgiven or discharged, for less than the amount you owe, the amount of the canceled debt is generally taxable, subject to certain exceptions. If found to be taxable, the amount must be reported on your tax return for the year the cancelation occurs. Are there any instances where the debt is not taxed? If the law explicitly states that you are allowed to exclude the debt from gross income, the canceled debt is not taxable. This includes situations where: The debt is canceled as a gift, bequest, devise (the act of giving or disposing of real property by will) or inheritance, Certain student loan debt incurred by those who work for a certain period of time in professions such as public service, military service, or teaching, The canceled debt would be deductible if you had paid it (as a cash basis taxpayer) Amounts that meet the requirements for any of the following exclusions are also not included in gross income (even though they are considered canceled debt). This includes: Debt canceled.... in a Title 11 bankruptcy case the debtor is considered to be insolvent in certain farm indebtedness cases in certain real property business indebtedness cases in certain cases involving principal residence indebtedness Important Forms A creditor might send you what’s called a Form 1099-C after a debt is canceled. Form 1099-C, Cancelation of Debt, shows the amount of canceled debt and the date of its cancelation. However, even if you do not receive this form from a creditor, your reporting responsibilities of your canceled debt on your return do not change. If the cancelation of debt is determined to be taxable, the income must be reported on the taxpayer’s tax return as ordinary income from the cancelation of debt. Does canceled debt affect my credit? Yes. Just because the creditor canceled the debt does not mean that the credit bureau has forgiven and forgotten about your debt. It could remain on your credit report for up to seven years. Questions on this? Contact us.