If you have had debt forgiven/cancelled by a credit card company or other creditor, then you have likely learned this rule the hard way...the IRS declares that you have received income and owe them some tax. They look at it as if the creditor paid you the money and then you used it to pay off the loan. So unless it meets one of the following exceptions, you must declare the forgiven debt on your tax return. The exceptions:
- Bankruptcy
- Insolvency, which means basically that your total debts are more than the fair market value of your total assets
- Certain farm debts
- Non-recourse loans, which are loans for which the lender cannot pursue you personally in case of default
- Forgiveness of Qualified Principal Residence Indebtedness (this is a newer exception that was part of the stimulus bill)
For more info read
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Disclaimer
The content on this blog (www.acollinscpa.blogspot.com) is my personal opinion based on my study and understanding of tax laws, policies and regulations. It’s provided for your private, noncommercial, educational and informational purposes only. It’s not a recommendation or endorsement of any company or product. It should not be relied upon as specific tax advice for your personal situation. I strongly suggest that when it comes to filing your taxes, you get additional, professional guidance from individuals who are familiar with your specific circumstances. Those who choose to rely solely upon the information on this site do so at their own risk and peril, and cannot hold the author liable in any form or fashion.
IRS CIRCULAR 230 DISCLOSURE REQUIREMENT: IRS Circular 230 requires us to notify you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding tax penalties that may be imposed by law.
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