Written by Marc R Barnes EA
August 09, 2016
Taxpayers with cancelled debt can often exclude the cancellation of debt income to the extent they were insolvent immediately before the cancellation. If a cancelled debt is excluded from income, it is nontaxable.

Form 1099-C, Cancellation of Debt

If a lender cancels or forgives a debt of $600 or more, it must provide the borrower with Form 1099-C, showing the amount of cancelled debt to be reported as income. Generally, individual taxpayers must include all cancelled amounts, even if less than $600, as Other Income on line 21, Form 1040.

Examples of COD Income

Nonbusiness credit card debt cancellation. If nonbusiness credit card debt is cancelled, the taxpayer may be able to exclude the cancelled debt from income up to the extent he or she is insolvent.

Personal vehicle repossession. If the taxpayer had a personal vehicle repossessed during the year, the transaction is treated as a sale, and gain or loss on the repossession must be computed. If the lender also cancels all or part of the remaining debt, the taxpayer may be able to exclude the cancelled debt from income to the extent he or she is insolvent.

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There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves summarizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning.

Please contact us in advance if you have questions about the tax effects of a transaction or event, including the following:
  • Pension or IRA distributions.
  • Significant change in income or deductions.
  • Job change.
  • Marriage.
  • Attainment of age 59½ or 70½.
  • Sale or purchase of a business.
  • Divorce or separation.
  • Notice from IRS or other revenue department.
  • Retirement.
  • Sale or purchase of a residence or other real estate.
  • Self-employment.
  • Charitable contributions of property in excess of $5,000.
Topic: Marriage and Family