What is cancellation of debt income?
The taxation of cancellation of debt income to the debtor depends on whether the debtor is solvent, insolvent, or bankrupt. However, all cancellation of indebtedness does not result in cancellation of debt income. Debt discharge may also be in the form of compensation.
How do you calculate canceled debt on a tax return?
Enter the smaller of the amount of the debt canceled or the amount by which you were insolvent immediately before the cancellation (use the worksheet to find this figure). You may also have to fill out part II of the form. If your canceled debt is qualified principal residence indebtedness, it’s not includible in your income.
Is canceled debt taxable?
In general, if you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable and you must report the canceled debt on your tax return for the year the cancellation occurs. The canceled debt isn't taxable, however,