Many Americans take on debt to pay for education, buy houses, cars, and countless other expenses. It is important to evaluate how much you can manage. However, sometimes we find ourselves with more debt than we can handle due to unemployment, health issues, or just life in general. In this case, having your debt forgiven would be a relief, but it may affect your taxes.
What is forgiven debt?
The lender of the credit or loan may choose to forgive or discharge your debt for less than the full amount you owe. The forgiven amount of debt is considered canceled. The lender can choose to erase the debt either completely or partially. This typically occurs for reasons such as not being able to collect the money after many attempts, foreclosures, repossessions, transfer or abandonment of property.
Is forgiven debt taxable?
Canceled debt must be reported on your tax return the year the cancellation occurs. The canceled debt is typically taxable.
Are there any exceptions?
Yes, the law makes some exceptions. Debt that has been erased for any of the following reasons is not taxable:
- Amounts canceled as gifts, bequests, devises, or inheritances
- Certain qualified student loans canceled under the loan provisions that loans would be canceled if you work for a certain period in certain professions for a broad class of employers
- Certain other education loan repayment or loan forgiveness programs to help provide health services in certain areas
- Amounts of canceled debt are deductible if you, as a cash basis taxpayer, paid it
- A qualified purchase price reduction given by the seller of property to the buyer
- Any Pay-for-Performance Success Payments that reduce the principal balance of your home mortgage under the Home Affordable Modification Program
- Amounts from student loans discharged on the account of death or total and permanent disability of the student
When a debt is canceled, be on the lookout for Form 1099-C sent from the creditor. If you receive this form, be sure to check it for accuracy. If there are discrepancies, contact the organization collecting the debt. If you have canceled debt to report, TaxSlayer can help you with your tax return. Get started for free today!
The information in this article is current through tax year 2019.