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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28081
Experience:  Taxes, Immigration, Labor Relations
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cancellation of debt

Customer Question

what does this mean?? how does this effect my taxable income...?
Submitted: 8 years ago.
Category: Tax
Expert:  Lev replied 8 years ago.
For cancelled debt you should receive a form 1099-C - - You should look at the box 2 - that amount is considered your income and in general is taxable. However there are some exemptions. If you was insolvent at the time of cancellation - you need to file a form 982 - to proof your insolvency - and may not include all or part of canceled dent into taxable income.

Please see the IRS Publication 908 Bankruptcy Tax Guide - - with example of the form 982 on the last page.

Please be advised that you have only 6 month after tax return is due to file 982 form - so it is too late for 2004 - thus it may be used for your advantage to have debt cancellation in 2007. Please provide all above information to your tax preparer for considerations.

Customer: replied 8 years ago.
is this going to reduce my refund for 2007???
Expert:  Lev replied 8 years ago.

If canceled debt is indeed your taxable income - yes - that will likely reduce your refund.

However, if you was insolvent at the time of cancellation - and file a form 982 - to proof your insolvency - and do not need to include canceled dent into taxable income - and that will not affect your refund.

Customer: replied 8 years ago.
Expert:  Lev replied 8 years ago.

Insolvency is inability to pay debts or obligations because the amount of debt is more than the value of assets. A person may still have an excess of assets over liabilities, but be insolvent if unable to sell assets.

The purpose of the form 982 is to proof your insolvency - you would lest all your debt and all assets - and show your insolvency. That is a ground to exclude canceled debt from taxable income.