Will I be taxed on my cancelled debt?

If a lender cancelled some or all of a debt you owed, the IRS—in most cases—counts the amount forgiven as income…and expects you to pay tax on it when filing your individual tax return.If your forgiven debt was for a home mortgage, you may not need to pay tax on this cancelled amount. The law excluding cancelled debt from income was extended through December 2016. Review these other facts to understand clearly the tax you owe on forgiven debt:

• 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 not need to pay tax on that amount. 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 equals $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.

The IRS now offers an Interactive Tax Assistant to help you determine whether your cancelled mortgage debt is taxable.For other questions on cancelled debt, repossessions and abandonments, you might find Publication 4681 or Tax Topic 431 helpful.Though the April deadline passed, we strongly recommend keeping accurate records on your cancelled debt and other items year-round to prepare for next tax season. If you need help with this or other tax accounting issues, contact the experienced team at Patrick & Robinson CPAs at Office@CPAsite.com or (904) 396-5400.