Debt Cancellation: Self Employment Tax

"Bye, hi, I’m Tom Choisnet, enrolled agent and we are going to talk some more, as I was with a client, about cancellation of debt. What cancellation of debt is about is where a lender forgives part of the obligation and therefore creates an income to you for the amount of forgiveness of the debt. That is called cancellation of debt income and it is taxable for many taxpayers. However, there is a big loophole here in the fact that if you are insolvent to the extent of the debt you do not have to pay tax on that. It is form 978, I believe, and you take a look at that form and you indicate that it was in fact due to insolvency. The insolvency again, need only be to the extent of the canceled debt and if you are unfortunate enough to lose your home and it was your largest asset, most likely you want have to pay tax on it. Hope that helps you on that one. I’m Tom Choisnet and take a look at some of my other clips; I hope they are informative for you, thank you."