16 Dec Can You Still Get Taxed on a Forgiven Debt?
If you have had a debt forgiven in the last year, you may be required to pay income taxes on the total amount when tax season rolls around. Forgiven debts are considered taxable income in most cases, and income from forgiven debts even has its own name: “Cancellation of Debt Income” or COD Income. After a debt has been forgiven, you’ll receive a 1099-C stating the amount of the debt that will be taxable. However, there are a few exceptions to the rule—read on to learn more.
Debts Won’t Be Taxed If You Were Insolvent at the Time of Forgiveness
If you are able to show that you were insolvent (basically the IRS word for “broke”) during the time that your debt was forgiven, you can avoid paying taxes on forgiven amounts. However, this will only apply up to the amount by which you are insolvent. Find out more about insolvency and how to calculate it here.
Debts Won’t Be Taxed If They Were Forgiven through Bankruptcy
If you filed for bankruptcy and your debts were forgiven that way, do not list that canceled debt as income or you will be taxed unnecessarily. However, if you file a late tax return, your taxes on repayment might not be discharged.
If Student Loans Forgiven after Working for a Period of Time
If your job offers you student loan repayment benefits after working at the job for a specific amount of time, you do not have to report this loan forgiveness as income on your tax forms. This rule only applies to certain qualified student loans.
If Your Forgiveness of Debt Was a Gift
If your debt was paid off with a gift, it cannot be taxed as income. The IRS typically believes individuals who claim they paid off a debt with a gift from a friend or family member. However, if you try to claim that you were granted debt forgiveness as a gift from the bank or your employer, the IRS will be less likely to believe you. It’s also important to note that if someone gifts you more than $15,000 in one year, they will have to fill out tax form 709. (This should not affect you as the recipient of the gift.)
Debt Reduction with Pivotal Wealth
The idea of having to pay taxes on a debt that has been forgiven can be scary, but it doesn’t have to be. If you’re struggling to understand whether or not you’ll have to pay taxes on debt, we’re here to help.
To learn more about debt forgiveness tax rules and how you can take the next steps toward living a debt-free life, contact Pivotal Wealth today. We’ll examine your personal financial situation, advise you on the best debt relief solutions available, and set you on the path towards building your wealth and a stronger financial future.