Did a lender forgive or discharge some of your debt? You could face an unexpected federal income tax bill. Canceled debt is generally treated as taxable income, even though you never received any cash. But exceptions and exclusions may apply. For example, debt discharged in bankruptcy or canceled while you’re insolvent may be partially or fully excluded from income. Insolvency generally means your total liabilities exceed the fair market value of your assets. Other exclusions may apply to specific types of debt, such as certain business-related real estate debt. If you receive a Form 1099-C, “Cancellation of Debt,” let us know. We can help determine how the canceled debt affects your taxes.
