Cancelled debt? Maybe it’s not taxable after all.

As a leading accounting firm in Jacksonville, we see many scenarios that can affect your individual income tax return. One such event is a cancelled debt.If you a creditor cancelled debt you owed, you probably know in most cases the IRS counts the amount forgiven as income…and expects you to pay tax on it.If your forgiven debt was for a home mortgage, you may also be forgiven from paying tax on the cancelled amount. A legal exclusion may apply to homeowners whose debt was cancelled in 2014.  (This exclusion was extended from 2013 under the Tax Increase Prevention Act.)

• If the debt was incurred for your main home and secured by that same home you may qualify for the legal exclusion. You must have purchased, built, or substantially improved this home with the loan.
• If you received a loan modification to cancel part of your mortgage you may be able to exclude that amount from being taxable. Also, if you qualified for a discharge of debt under the Home Affordable Modification Program (HAMP) or suffered a foreclosure the exclusion may apply.
• If your forgiven debt was for a refinanced mortgage and you used the proceeds to buy, build or substantially improve your main home the exclusion may also apply. (Any amounts you used for other purposes don’t qualify though.)
• If your cancelled debt was $600 or more, expect your lender to send you Form 1099-C, providing you with the amount of cancelled debt and other information for your tax return.
• If you qualify for an exclusion, report this on Form 982 and file it with your tax return.

For more information on cancelled debt, repossessions and abandonments you might find Publication 4681 or Tax Topic 431 helpful.If you need help from a professional tax preparer contact the tax accounting team at Patrick & Robinson CPAs at Office@CPAsite.com or 904-396-5400.