If you owe money to someone and are unable to pay, your creditor may cancel, or forgive, the money you owe. In many instances, the Internal Revenue Service treats this cancelled debt as taxable income. In fact, if the value of the debt is $600 or more, you will receive Form 1099-C from the creditor. (The creditor will provide the IRS a copy of that same form.)
Cancelled Debt as Taxable Income
In general, cancelled debt is NOT considered taxable income if:
- The cancelled debt is a bequest, inheritance or gift
- If your student loan debt was cancelled in exchange for your work in a certain profession
- Your debt was cancelled during bankruptcy
- You were insolvent immediately before the cancellation
- The cancelled debt is a result of a mortgage modification or foreclosure between the years of 2007 and 2013, per the Mortgage Forgiveness Debt Relief Act
In addition, certain cancelled farm debt may not be treated as taxable income.
Federal and state tax laws can be complicated. If you receive a Form 1099-C and are unsure of whether you must report the cancelled debt as income, consult with a tax attorney or accountant.