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How to Exclude Income From Canceled Debt

You may claim insolvency to the extent your liabilities exceed your assets to exclude income from the cancellation of indebtedness reported to you on Form 1099-C.

These are great questions as many taxpayers are being issued Form 1099-C for cancellation of indebtedness and there is a lot of confusion in this area.

The general rule is that when debt you ow...e is canceled, it is required to be included in income reported on your tax return. However, there are exceptions to this rule and, yes, one of those is insolvency. You must complete and file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and file it with your Form 1040. The IRS has a detailed work sheet to calculate insolvency in Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. You will see that pensions are includable as an asset, so be sure to add that in to the calculation.

Please remember that you can exclude the canceled debt income only up to the amount you were insolvent, so not all of the income may be excluded.

As far as it "showing up on your records," the insolvency issue is reflected on Form 982, which is part of your private tax return information and not disclosed without your permission.

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