If a lender cancels or forgives a debt you owe (like a credit card balance or mortgage), the IRS generally treats the canceled amount as taxable income .
Form 1099-C
You will typically receive Form 1099-C (Cancellation of Debt) showing the amount of forgiven debt in Box 2. You must report this amount as “Other Income” on your tax return unless an exception applies .
Common Exceptions
You may be able to exclude this income from your taxes if:
- Insolvency: You were insolvent (your debts exceeded your assets) immediately before the debt was canceled .
- Qualified Principal Residence: The debt was a mortgage on your main home (subject to current tax law extensions and limits) .
- Student Loans: Certain student loan discharges (e.g., for public service or total disability) may be tax-free .
Official IRS Resource:Canceled Debt – Is It Taxable or Not?
