Summary

This course covered cancellation of debt issues that are both within scope and out of scope in the VITA/TCE program.

Cancellation of debt can be complex. VITA/TCE volunteers may assist a taxpayer with issues related to cancellation of debt as long as the taxpayer meets all the criteria for discharge of qualified principal residence indebtedness or if all debt canceled and reported on Form 1099-C was nonbusiness credit card debt.

Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may exclude certain debt forgiven or canceled on their principal residence. This exclusion is applicable to the discharge of "qualified principal residence indebtedness." If the canceled debt qualifies for exclusion from gross income, the debtor may be required to reduce tax attributes (certain credits, losses, and basis of assets) by the amount excluded.

Refer taxpayers who were insolvent immediately before the credit card debt was canceled to a professional tax preparer—all or part of the canceled debt might not be considered taxable income. (An insolvent taxpayer has liabilities that exceed the FMV of all assets.)

VITA/TCE tax preparers with Advanced, Military, or International Certification and who are certified in this module may assist taxpayers with canceled or forgiven mortgage debt issues on a limited basis. Use Publication 4731, Screening Sheet for Form 1099-C, Cancellation of Debt, which provides questions and step-by-step guidance for the volunteer tax-return preparer.

This is an optional specialty course. Check with your Site Coordinator to determine whether you should be certified in this topic.