How to Report Canceled Debt Taxable Income

If a lender cancels your loan, you must report the canceled amount in your taxable income unless it qualifies for an exception to the rule. Credit card debt, home mortgages, business debt, bank loans, student loans and other personal loans are reported as income if canceled. The exceptions include certain student loans, bankruptcy, insolvency and if the canceled loan is considered to be a gift. Read on to learn to report canceled debt taxable income.

Difficulty: Moderately Easy

Instructions

1. Determine if you have any debts that were canceled during the year and do not qualify as exceptions to the inclusion in income rule for canceled debt. If you are a stockholder in a corporation that cancels a loan to you, that is considered to be a dividend to you.

2. Receive a Form 1099-C, Cancellation of Debt, from a financial institution, credit union, or a Federal agency that cancels or forgives a debt. The canceled amount plus any interest is shown in Box 2 of the form.

3. Review Box 3 of Form 1099-C to see if any interest was forgiven. Deduct the interest by subtracting Box 3 from Box 2 if it is not personal loan interest.

4. Exclude from income any canceled debt that is considered to be a gift, student loans forgiven when specific work is required and cancellations due to insolvency or bankruptcy.

5. Report cancellation of debt income on Line 21 of Form 1040 if it is a nonbusiness debt. If it is a business debt, report the income on Schedule C or Schedule C-EZ of Form 1040.

Tips & Warnings

• Loan amounts that are reduced by the seller as part of a price reduction of property purchased by you are not included in income. The loan reduction is considered to be a purchase price adjustment and not canceled debt income.

Resources

• Form 1040