Exceptions and Exclusions
Some canceled or forgiven debts may be eliminated from income by applying exceptions, or reduced by applying exclusions to the general rule. Exceptions are applied before exclusions.
Exceptions may allow the taxpayer to eliminate the following types of canceled debt from income:
For more information on exceptions, refer to Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.
There are several exclusions from the general rule for reporting canceled debt as income.
Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, must be filed with the taxpayer's return to show the amount of the canceled debt excluded.
The exclusions are:
The issues involved in exclusions can be complex. Only cancellation of qualified principal residence indebtedness is within the scope of VITA/TCE.