You do not have to report 1009-C income on your current year income tax return for the following types of debts:
1. Debts discharged in bankruptcy. If you filed for bankruptcy protection, do not report the canceled debt as income.
2. Mortgage debt forgiven due to foreclosure. Undert the Mortgage Forgiveness Debt Relief , you probably do not have to pay tax on debt forgiven when you lost your home.
3. Debts canceled when you were insolvent. Debt is generally only canceled when debtors are “insolvent” or broke – but only up the amount by which you are insolvent.
4. Student loans forgiven after you worked a period of time. If your student loans contain a loan forgiveness provision based on service in your field of work (ie – Public Service Student Loan Forgiveness) do not include the canceled debt as income.
5. Interest that would have been deductible – like interest on business debt. You do not have to pay tax on the interest if you could have deducted it.
6. Cancellation of debt as a gift. If the cancellation of debt is a gift, it’s not income especially when it’s between parties such as family members or friends.