Canceled or Forgiven Debt

As a general rule, debt that is canceled or forgiven by an official lender is considered taxable income. For example, if you settle a credit card debt for less than the full balance, you will owe income tax on the amount that was forgiven. This extra income can increase tax bracket, Child tax credit. Earned Income Credit etc can be lower or eliminate. So please consider the tax implications before you make a decision to negotiate with lender. In short, if you received a 1099 C from a lender, don't discard it, bring it to the Accountant at the time of income tax preparation. 1099 C need to report on the tax return.

Exceptions

Debts discharged in bankruptcy

If you filed for bankruptcy protection, do not report the canceled debt as income. A debt discharged in bankruptcy has no income tax consequences to an individual debtor, as it is excluded from a debtor's gross income pursuant to Internal Revenue Code �108(a)(1)(A).

Forgiven interest on Business Debt

Forgiven interest on business debt is not considered as income if your business follow the cash basis accounting. You do not have to pay tax on the portion of the debt due to interest, if you could have deducted the interest if you had paid it. On the other hand, if you could not have deducted it. for example, if it was interest on a personal credit card, you must pay taxes on all the forgiven debt, including the interest.

If you need any more information regarding the above topic, contact me at 630-663-1500.