How to Report Cancelled Debts on Tax Returns

Exceptions to Reporting Cancelled Debt

Finding out you owe money to the IRS when you have already struggled financially and ultimately cancelled your debt can seem like adding insult to injury. However, don't panic just yet. Even if you have cancelled debt, you may not be obligated to pay it if you meet certain qualifications, or if your debt falls under certain scenarios.

Here's how you can qualify for exemptions on your cancelled debt [source: Wood]:

  • Your debts were discharged via bankruptcy.
  • You were insolvent, meaning your debts exceeded your assets when the debt was forgiven.
  • You borrowed money from someone who passed away, and they released you from the debt in their will.
  • Your student loan debt is cancelled due to your employment with a government or educational institution that releases you from your debt.
  • You reduce your mortgage under the Home Affordable Modification Program.
  • The debt was non-business, cancelled before 2007, and resulted from Hurricane Katrina.
  • The debt would have been deductible if you had paid it.
  • You qualify for the Mortgage Forgiveness Debt Relief Act of 2007.

For most exceptions to paying taxes on cancelled debts, report them on IRS Form 982. Of course, these exceptions can be difficult to calculate and report, so consider consulting a tax professional.

Keep reading to find out how to report cancelled debt on your tax return.