Canceled Debt that Qualifies Exclusion from Gross Income
When it comes to your taxes and calculating loan repayments, you want to make sure you thoroughly understand what you're doing so you don't have to go back and pay for something you didn't know you owed. When you file taxes, the most important thing is to know your gross income so that you can report it correctly to the Internal Revenue Service. Don't assume that you have to pay in more if your income gets higher because that isn't always the case.
Tax forms can be complicated and often one is affected by another. For instance, you'll have a main tax form that others will contribute to. If an amount changes on one, it's likely to change the amounts on your main tax form, like the 1040 form that many taxpayers use. In that same mindset is the fact that a form will be filled out to prove your exclusion for canceled debts. Make sure that you use the appropriate form, which is going to be different for different types of canceled debt exclusion. You won't use the same form for foreclosure exclusion as you will for gift exclusion.
Canceled Debt Counted as Income?
Canceled debt is included as income because it becomes part of your estate. You no longer owe the money, so there is a reduction in the amount of money going out. If you have less money going out, the amount of money you get to keep is naturally larger than it was before the debt was canceled. What this means for you is that though you may not be actually making more money per month than you were, the amount that you actually get to keep yourself has increased and must be counted as part of your gross income.
Debt Exclusion from Gross Income
There are some cancelations of debt that can be excluded due to the way they are paid off. For instance, if you owe a debt and the debt is paid off as a gift to you or bequest to you, this removal of debt can be excluded from counting toward your income. In fact, there are multiple exclusions or income that is considered nontaxable if it is a gift or bequest. Some canceled student loan debt is also able to be excluded due to the nature of the cancelation and of the debt itself.
The inability to pay the debt is also sometimes grounds for exclusion from inclusion from gross income. When Chapter 11 bankruptcy is filed on debt, this means that the canceled debt may be excluded. The reasoning is that you aren't actually benefitting from the cancelation of debt and it is being dealt with through a government entity already. If you are disable and unable to pay debt, this may also qualify the canceled debt from be included as part of your gross income. Again, your income is not impacted by the loss of the debt, so it doesn't count toward your income.
There is some property that doesn't count toward your gross income. The current mortgage crisis has led to new laws that exclude foreclosure as being counted toward a loss of income. A single American can exclude as much $2,000,000 in cancelled debt through foreclosure. Some forms of canceled farm debt also qualify for exclusion from your gross income. If you've had canceled debt that was real property business debt, this can sometimes be excluded from your gross income. Again, you simply have to make sure you have the correct forms so that you are excluding the canceled debt legally.
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