If you had a debt cancelled during the tax year, you generally need to report this as income on your return. However, if any of the following apply, you may be eligible to exclude the cancellation of debt from your income. You may exclude the cancellation of indebtedness if it was a:
- Discharge of qualified principal residence indebtedness
- Discharge of indebtedness in a title 11 case
- Discharge of indebtedness to the extent insolvent (not in a title 11 case)
- Discharge of qualified farm indebtedness
- Discharge of qualified real property business indebtedness
Most taxpayers will only qualify to exclude debt for reasons 1, 2, or 3. Generally, most individuals do not qualify to exclude debt for reasons 4 or 5. If any of the above apply to your cancellation of debt, you can exclude the applicable amount from income by first reporting it on Form 1099-C. You would then report the amount that qualifies for exclusion on Form 982.
Common Mistakes to Avoid
Be sure that you qualify for the exclusion. [#AFFILIATE#] has no way of knowing for certain whether you meet ALL of the qualifications. If you are unsure if your cancelled debt qualifies to be excluded, contact the IRS at 1-800-829-1040. They can help you know for sure. Do not attempt to exclude an amount if you are not certain that you qualify. Most taxpayers would only qualify to exclude debt for reasons 1, 2, or 3 above. Generally, most individuals do not qualify to exclude debt for reasons 4 or 5.
You should not report a larger amount on Form 982 than the total of the amounts reported on Forms 1099-C. The exclusion can only be used to reduce the amount of cancelled debt. It can't be used to reduce other types of income.
Be sure that all Forms 1099-C get marked as being for the correct person (Taxpayer or Spouse). If these get marked incorrectly, your return may calculate incorrectly. In addition, you would be reporting incorrect information to the IRS.
Be sure that your Form 982 gets marked as being for the correct person (Taxpayer or Spouse). If it gets marked incorrectly, the exclusion would get reported for the wrong person, which could potentially throw up a red flag with the IRS.
To locate Form 982 within our program go to Income > Other Income > Cancellation of Debt > Exclusions (Form 982) or use the Search found under the Refund Calculatoron the right side of the screen.