Have you heard of student loans, credit card companies or other lenders “forgiving” or “cancelling” debt consumers owe to them? Sounds great, right?!
Well, maybe not so great if you know the implications that might have on your taxes. Any debt that has been cancelled can be considered taxable on your income tax return. You would normally receive a Form 1099-C, Cancellation of Debt, showing the amount that has been forgiven by the lender.
When the money was borrowed you did not have to include the amount you received in income because it was intended that you would repay this amount to your lender. When that loan is no longer due (forgiven), the amount you received as income originally is reportable as taxable because you no longer have an obligation to repay the lender.
However, there are some situations debt forgiveness may not be taxable…
- You filed Bankruptcy
- You were Insolvent
- You owned a Farm
- You had a Non-Recourse Loan
- You owned a Qualified Principle Residence
Be sure to think carefully about having debt forgiven. You may be off the hook for the debt, but you could still owe tax on it!