If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
The provisions of the Mortgage Debt Relief Act of 2007 have been extended through 2013, but are scheduled to expire at that time.
How do I report the forgiveness of debt that is excluded from gross income?
- Check the appropriate box under line 1 on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to indicate the type of discharge of indebtedness and enter the amount of the discharged debt excluded from gross income on line 2. Any remaining canceled debt must be included as income on your tax return.
- File Form 982 with your tax return.
To access Form 1099-C in the TaxACT program:
- From within your TaxACT return (Online or Desktop), click on the Federal Q&A tab
- Click Other Income to expand the section and then click Cancellation of Debt (Form 1099-C)
- The program will proceed with the interview questions for you to enter or review the appropriate information
If you qualify for this exclusion, you would use Form 982 to report the exclusion of the canceled debt. Form 982 will follow the 1099-C interview.
More information, including detailed examples can be found in Publication 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS News Release IR-2008-17.
Please refer to The Mortgage Forgiveness Debt Relief Act and Debt Cancellation on the IRS website for more information.