When a portion of a debt, resulting from a loan or credit purchase, is forgiven or discharged, the forgiven amount is typically considered taxable income for the debtor.
Key Points:
- Canceled debts occur when a creditor forgives a portion of what you owe, which can happen in various situations, including debt settlements.
- The forgiven debt is usually treated as income for tax purposes, potentially leading to additional tax liabilities.
- It’s essential to report canceled debts accurately on your tax returns and explore potential exclusions or exceptions.