When a debt you owe is canceled or discharged, the tax code treats the wiped-out debt as cash income to you that you must report. If you owe $500,000 to the bank, but the bank forgives it, it's as if the bank just handed you $500,000 so the IRS wants a cut. Fortunately, there are exceptions.
The Act initially covered 2007 through 2010 and was eventually extended to 2020. Then, the Consolidated Appropriations Act extended the exclusion to cover 2021 through 2025. However, the maximum amount of excluded forgiven debt is now limited to $750,000. Not surprisingly, if your lender writes off some of your mortgage, you will have to reduce your basis in the residence by the amount of discharged debt that does not count as income to you.
The argument is based on the notion that a discharged debt is not income if the taxpayer contests the original amount of the alleged debt in good faith. In, 2167 F.3d 1323 , the court stated that a subsequent settlement of a disputed debt is treated as the amount of debt for tax purposes. In other words, the excess of the original debt over the amount determined to have been due can be disregarded in calculating gross income.
Before 2021, student debt cancelation was generally considered a form of income, and therefore taxable both at the federal and usually state level. But in March of 2021, the American Rescue Plan changed that. Until the end of 2025, the U.S. government willconsider canceled student loan debts to be taxable income. Thus, President Biden's sweeping student debt relief is not subject to federal income tax.income tax on all those canceled loans.
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