The Tax E Man Blog, along with our website www.PatTax.net, are designed to be year round resources for tax consultation, preparation and representation services provided by Baldwin NY Tax Preparation service Pat Tax Inc. and Patrick White, Enrolled Agent . Please feel free to contact us with any questions or  concerns.

 

Cancellation of Debt — Insolvency

Taxpayers with cancelled debt can often exclude the cancellation of debt income to the extent they were insolvent immediately before the cancellation. If a cancelled debt is excluded from income, it is nontaxable.

 

Cancellation of Debt

Cancellation of debt (COD) is settlement of a debt for less than the amount owed. A debt may be cancelled by a lender voluntarily or through bankruptcy or other legal proceedings and may result in ordinary income, income from the sale of assets, or both.

 

Read Cancellation of Debt – Insolvency 2016 here

 

Cancelled Debt Situation	Tax Treatment
Debt owed by a taxpayer is cancelled or forgiven.	Amount cancelled or forgiven is generally taxable as ordinary income from cancellation of debt.
Property that is security for a debt is taken by the lender in full or partial satisfaction of that debt.	The transaction is treated as a sale of the property, which may result in a gain or loss.
Property that is security for a debt is taken by the lender, and lender cancels recourse debt in excess of FMV of property taken.	Excess of cancelled debt over FMV is ordinary income from cancellation of debt, in addition any gain or loss from the sale.
Cancelled debt is intended as gift.	Amount cancelled is not income.*
*Gift tax may apply.

 

Form 1099-C, Cancellation of Debt

If a lender cancels or forgives a debt of $600 or more, it must provide the borrower with Form 1099-C, showing the amount of cancelled debt to be reported as income. Generally, individual taxpayers must include all cancelled amounts, even if less than $600, as Other Income on line 21, Form 1040.

 

Read Cancellation of Debt – Insolvency 2016 here

 

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If desired, Pat Tax, Inc. would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired.

The Tax E Man Blog, along with our website http://www.PatTax.net, are designed to be year round resources for tax consultation, preparation and representation services provided by Pat Tax, Inc. . Please feel free to contact us with any questions or concerns.

 

Read Cancellation of Debt – Insolvency 2016 here

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