In this economy it is not unusual for a taxpayer’s debt to be forgiven or just written off. In general, cancelled debt that the taxpayer was personally liable for is taxable. But, there are the following exceptions where cancelled debt is not taxable:
- Cancelled debt that would have been deductible if paid is not taxable.
- Student loans that are cancelled after work is not taxable. An example is a nurse or doctor who takes a job in a government approved low income area.
- Debt cancelled in a Title 11 bankruptcy is not taxable.
- Debt cancelled where a taxpayer is insolvent (up to the amount of the insolvency) is not taxable. The amount of insolvency is the amount of the taxpayer’s debt that is above the total of taxpayer’s assets.
- Cancelled debt that is qualified principal residence indebtedness is not taxable.
- Cancelled debt that is intended to be a gift is not taxable.
As you can see, there are many exceptions to the general rule that cancelled debt is taxable. Additionally, it is a very complicated area that most taxpayers will require the help of an experienced tax professional.
Like any good CPA, I need to add a disclaimer: unfortunately, it is impossible to offer comprehensive tax info over the internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.