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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
Category: Tax
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Experience:  10 years experience
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Will forgiven credit card debt of my late husband be

Customer Question

Will forgiven credit card debt of my late husband be considered income for his final tax return for 2015 ?
Submitted: 1 year ago.
Category: Tax
Expert:  Angie replied 1 year ago.

First, let me say that I am so very sorry for your loss. I know how difficult it is to lose your husband.

Yes, if a credit card company has forgiven debt, they will issue a 1099-C at the end of the year that will need to be reported on the tax return. There are few exceptions and exclusions for this as I have pasted below, but generally it will be reported as income.

Debt Cancellations or Reductions that Qualify for EXCEPTION to Inclusion in Gross Income:

  1. Amounts specifically excluded from income by law such as gifts, bequests, devises or inheritances
  2. Cancellation of certain qualified student loans
  3. Canceled debt, that if it were paid by a cash basis taxpayer, would be deductible
  4. A qualified purchase price reduction given by a seller
  5. Any Pay-for-Performance Success Payments that reduce the principal balance of your home mortgage under the Home Affordable Modification Program

Canceled Debt that Qualifies for EXCLUSION from Gross Income:

  1. Debt canceled in a Title 11 bankruptcy case
  2. Debt canceled during insolvency
  3. Cancellation of qualified farm indebtedness
  4. Cancellation of qualified real property business indebtedness
  5. Cancellation of qualified principal residence indebtedness

The exclusion for qualified principal residence indebtedness provides tax relief on canceled debt for many homeowners involved in the mortgage foreclosure crisis currently affecting much of the United States. The exclusion allows taxpayers to exclude up to $2,000,000 ($1,000,000 if married filing separately) of canceled qualified principal residence indebtedness.

Generally, if you exclude canceled debt from income under one of the exclusions listed above, you must reduce certain tax attributes (certain credits, losses, basis of assets, etc.), within limits, by the amount excluded. You must file Form 982 (PDF), Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the amount qualifying for exclusion and any corresponding reduction of those tax attributes. For cancellation of qualified principal residence indebtedness that you exclude from income, you must only reduce your basis in your principal residence.

If you received a Form 1099-C and the information is incorrect, contact the lender to make corrections. Refer to Publication 4681 (PDF), Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals), for more detailed information regarding taxability of canceled debt, how to report it, and related exceptions and exclusions. Publication 525, Taxable and Nontaxable Income, contains additional information. If you received a Form 1099-A (PDF), Acquisition or Abandonment of Secured Property, review Topic 432 for more information.

I hope this helps you.

Customer: replied 1 year ago.
Thank you- does this apply even if he paid for credit protection ?
Expert:  Angie replied 1 year ago.

No, if he paid for credit protection, then in essence is was an insurance policy payable in the event he passed away. The balance would have been paid by the protection plan and would not be considered a cancelled debt (written off) by the insurance company.