New York State Tax

Is Cancelled Debt Taxable?

Cancelled debt is forgiven debt due to various circumstances. When a lender decides to forgive a person's debt, it is called forgiven debt. This occurs when a statute of limitations has expired on a debt, through a debt settlement program or when a lender decides a debt is uncollectible. In almost all cases, cancelled debts are taxable. There are few circumstances where a cancelled debt is not taxable. One of these times occurs when debt was discharged through a bankruptcy. Another occurs if a person is considered insolvent. If a cancelled debt is taxable, the lender who cancelled the debt will send the person a 1099-C. This form is a cancellation of debt tax notice. If a consumer receives this, he should ask a tax advisor about it. In almost every circumstance, the person will be required to include this as income on his tax return.

Many states have different laws regarding cancelled debts; which means that depending on the state you live in, the federal laws might vary from the state laws. According to the IRS, forgiven debt, or cancelled debt, is income. Because of this philosophy, almost all cancelled debts must be claimed on a person's federal tax returns. It is always important to ask a tax professional about this if you receive a 1099-C. There are a few exclusions, and it is possible that these might apply to you.

One of the most common times when this happens is when a person completes a debt settlement program. For example, if a person owes $5,000, but his creditors agree to accept only $3,000, the difference of $2,000 is considered income for the person. In this case, the lender will issue a 1099-C for $2,000 to this person. The person must then claim this as income on his tax return. Another time when this occurs is when a company writes off a debt. If a person owes a $3,000 bill, but the company considers it uncollectible, the company can issue the person a 1099-C. The form would be listed for the full amount of $3,000. This amount must be reported on the person's tax return as income.

One common way that people avoid this is by filing bankruptcy. All debts cleared through a bankruptcy are considered forgiven, and are not subject to taxes.

If you need help filing your personal tax return or have other questions regarding federal or state tax, you can use these links to find professional bookkeepers and Certified Public Accountants in your area.