When seeking relief from your debts there are few options available to you. Debts are classified as “forgiven” you could carry some tax liability over that debt. If you have had any debts forgiven in the last year there are some important things to consider when completing your tax return.
The IRS has a Cancellation of Debt form that you may be required to fill out if you had any debts resolved in the last year. Generally, borrowing money from a lender that is later forgiven is included as taxable income on your tax return. This is because having received money that was never repaid is classified as the same as general wages or income. However, there are some exceptions to this rule.
One exception is forgiven mortgage debts. The Mortgage Debt Relief Act of 2007 has been extended to mortgage debts forgiven through the taxable 2013 season, allowing the restructuring or discharge of debt on a principal residence to be excluded as income on the tax return.
The other exception are debts that are cancellation in a bankruptcy filing or insolvency hearing will need to be included on your tax return. However, that doesn’t mean that those debts will be counted against you as income. When debts are forgiven in Ohio bankruptcy your creditors will provide you with the 1099-C form to complete, but you may qualify for the insolvency exception if the fair market value for your listed assets is less than the amount of your forgiven debts.