Cancellation of Debt Issues in Scope for VITA/TCE
A debt includes any indebtedness for which a taxpayer is liable or which attaches to the taxpayer's property. Cancellation of indebtedness can involve auto loans, credit card debt, medical care, professional services, installment purchases of furniture or other personal property, mortgages, and home equity loans. Generally, if a debt for which a taxpayer is personally liable is canceled or forgiven, the taxpayer must include the canceled amount in income. There is no income from canceled debt if the cancellation or forgiveness of debt is a gift or bequest.
Only two types of cancellation of debt issues are in scope for VITA/TCE:
Publication 4731, in Volunteer Resource Guide (Income Tab), provides step-by-step guidance for the volunteer tax return preparer to determine if the cancellation of debt is within scope.
For all other cancellation of debt issues, refer the taxpayer to a professional tax preparer.
The qualified principal residence debt provision is subject to change. See the current Publication 4491X for any updates.