It is the time of the year that our office starts to get calls from our clients who filed for Bankruptcy during the past year. They have either just received a 1099-C or are about to make a trip to their tax preparer. They are concerned about whether the canceled debt is to be included in their gross income for their 2013 income tax return.
Generally, if a debt is forgiven or discharged for less than the amount that is owed, the debt is considered canceled. Generally, a canceled debt must be included in your income, but there are some exceptions and exclusions.
A debt canceled in a Title 11 Bankruptcy case is not included in your income. (A Title 11 Bankruptcy case is either a Chapter 7, 11 or 13 case). In order to report that the canceled debt is one that has been discharged in a Bankruptcy case, you will need to file IRS Form 982 with your 1040 tax return. You will need to report check box 1a on Form 982 and enter the total amount of the debt canceled in your Bankruptcy case on line 2.
The IRS website provides helpful links to many helpful publications and necessary forms. Please be certain to check out Publication 4681 – Canceled Debts, Foreclosures, Repossessions and Abandonments and IRS Form 982.