Debt Cancellation Income

• Debt cancellation income is the result of a creditor forgiving a debt you personally owe. You will receive a 1099-C if a credit card balance is forgiven or you have a vehicle repossessed. The amount shown on the 1099 is the balance of unpaid debt that is cancelled. If your home is foreclosed or abandoned, you will receive a 1099-A from the mortgage company. A 1099-A lists the balance of mortgage remaining and the fair market value of the property at the time of foreclosure.
  
  

Exclusions

• If you receive a 1099-C, you may be eligible to have the amount excluded from your taxable income if you are bankrupt or insolvent immediately before the debt is canceled. You are insolvent if the combined liability from all sources exceeds your total equity in assets. If you receive a 1099-A, your taxable income is limited to the amount of debt that exceeds the value of the property at the time of the foreclosure or abandonment. When the abandoned property is your personal residence, you may qualify for an additional exclusion from taxable income if you lived in the home for at least three consecutive years prior to the cancellation. Single taxpayers are eligible to have up to $250,000 of personal residence capital gains excluded and married filing joint taxpayers are eligible to have up to $500,000 of gain excluded.
  
  

Figuring the Tax

• If your canceled debt income is subject to tax, the amount is added to your adjusted gross income. Your adjusted gross income is comprised of all taxable income sources, minus certain deductions. Next, your standard or itemized deductions and allowable exemptions are subtracted from the adjusted gross income. This determines your taxable income and the tax due is listed on the Internal Revenue Service tax table for your filing status and amount of income. Because your canceled debt is included with other income sources, the tax on the debt forgiveness is subject to the tax bracket applied to your total income for the year.
  
  

Reporting 1099 Figures

• If your canceled debt meets criteria for full or partial exclusion, you still must report the income on your tax return and attach additional statements to support your circumstance. Failure to report the income, even when you do not owe tax on the debt forgiveness will cause the IRS to adjust your return and assess income tax on the amounts shown on the 1099s you receive. To report insolvencies concerning 1099-C income, complete and attach IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. If your canceled debt is concerning a personal residence, report the transaction on IRS Schedule D, Capital Gains and Losses.