Take Control of Your Finances Sign up to get the latest tax tips, information on personal finance and other key resources sent straight to your email. Cancellation of debt is not all positive news, however. TaxAct makes preparing and filing your taxes quick, easy and affordable so you get your maximum refund. Start free now or sign into your TaxAct Account. Start for free Sign In. Related Articles. Donate to Charities to Decrease Taxable Income.
Nonresident Alien Income Tax Return as "other income" if the debt is a nonbusiness debt, or on an applicable schedule if the debt is a business debt. Caution: If property secured your debt and the creditor takes that property in full or partial satisfaction of your debt, you're treated as having sold that property to the creditor. Your tax treatment depends on whether you were personally liable for the debt recourse debt or not personally liable for the debt nonrecourse debt.
If your property was subject to a recourse debt, your amount realized is the fair market value FMV of the property. Your ordinary income from the cancellation of the debt is the amount of the debt in excess of the FMV of the property that the lender forgives. You must include this cancellation of debt in your income unless an exception or exclusion, discussed below, applies. The difference between the FMV and your adjusted basis usually your cost will be gain or loss on the disposition of the property.
If your property was subject to a nonrecourse debt, your amount realized is the entire amount of the nonrecourse debt plus the amount of cash and the FMV of any property you received. You will not have ordinary income resulting from debt cancellation. See Publication , Canceled Debts, Foreclosures, Repossessions, and Abandonments for Individuals for detailed information on canceled debt and on reporting gain or loss from repossession, foreclosure, or abandonment of property.
Amounts that meet the requirements for any of the following exceptions aren't cancellation of debt income. Amounts that meet the requirements for any of the following exclusions aren't included in income, even though they're cancellation of debt income.
In , the IRS received more than 3. The cancellation of debt can greatly help provide relief to a distressed borrower. In some cases, debt forgiveness may also be offered between countries for economic support. There are quite a few exceptions when it comes to the cancellation of debt income. Defined by the IRS, the following are not considered cancellation of debt income:. The following exclusions are considered cancellation of debt income but the IRS excludes them from being reported as income.
Negotiating the cancellation of debt with a creditor can be challenging. Most creditors are not willing to cancel individual debts as interest and fees on approved credit is the main source of income influencing their bottom line. However, some creditors do include provisions in their credit agreements for canceled debt.
Many creditors also have credit relief services which can be obtained for a small additional fee and used in specific hardship situations such as a job loss or a medical occurrence. Reviewing the credit card terms of all creditors can help a borrower to identify on their own any creditors that they may easily qualify for debt cancellation from. Certain loans issued under government programs may have a higher chance of debt forgiveness. These loans may include student loans or mortgage loans eligible for debt forgiveness under government-sponsored relief programs.
For distressed borrowers, some lenders may also be willing to negotiate principal reductions on mortgage loans since it could save them some of the costs of a foreclosure. Debt relief and settlement companies are available across the nation to help with debt forgiveness. Working with a credit counseling resource such as the National Foundation for Credit Counselors can help a borrower identify an appropriate program for their situation.
Debt settlement companies are for-profit entities that work on behalf of a borrower to negotiate a debt settlement with creditors. There are numerous caveats to working with these companies and the process for settlement can take years. However, debt settlement can be an option for borrowers who have been steadily delinquent in payments. Debt relief programs will usually request that borrowers stop payments on their monthly credit bills in order to increase the likelihood that a creditor will settle.
Generally, most companies will also require clients to make monthly escrow payments toward a lump sum settlement which would be paid at some time in the future.
In many situations, bankruptcy may be the best option for a distressed borrower. In bankruptcy, the borrower has the support of an attorney and the courts. Debt forgiveness is also not considered income in bankruptcy which can help save tax liabilities. Bankruptcy is a complicated process and the impacts can be long-standing.
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