This time of year I am often asked whether debts forgiven in bankruptcy are taxable? The question becomes far more serious if the person has received a form 1099 from a creditor reflecting cancellation of debt. The tax laws make many forms of income taxable including “cancellation of debt income.” However, the law also contains exceptions making some cancelled debts nontaxable. Internal Revenue Code section 108 contains exceptions to the general rule that cancelled debt is taxable. One of the exceptions is for debts forgiven in bankruptcy.
So how do you deal with that pesky 1099? The answer is to include IRS form 982 with your tax return. In fact, IRS Publication 4681 has a detailed discussion of cancelled debts including the exception for debts forgiven in bankruptcy. Unfortunately many people preparing their own tax returns and even some tax professionals erroneously include cancelled debt as taxable income. Claiming the exception is the taxpayer’s responsibility, and failure to claim the exception will result in the cancelled debt being taxable. Don’t make this mistake!
At the Law Office of Michael Primus we have helped thousands of clients get out of debt, stop wage garnishments, and start fresh through bankruptcy. If you live in Contra Costa County and have debt problems, contact us for a free in-office consultation. We have offices in Walnut Creek, Antioch and Hercules.