In this weak economy, taxpayers have lots of questions about cancellation of debt and taxability.
According to the tax code, if a debt for which you are personally liable is canceled or forgiven, other than as a gift or bequest, you may have to include the canceled amount in gross income. While it’s important to know if your canceled debt qualifies for exclusion from your income, it is also necessary to still report any taxable amount as ordinary income from the cancellation of debt.
A recent case found a taxpayer’s discharged credit card debt not excludable from income and the amounts paid to a the debt negotiation company not deductible.
CCH (http://tax.cchgroup.com/) reports:
An individual taxpayer was not entitled to exclude from income a discharged credit card debt or claim a deduction for payments to a debt negotiation service. The taxpayer did not introduce documentary evidence or offer testimony sufficient to determine the fair market value of her assets; therefore, she did not demonstrate that she was insolvent before her credit card debts were cancelled and could not exclude from income the amount of indebtedness that was discharged. Furthermore, the taxpayer did not establish that amounts she claimed were paid to a debt negotiation company were actually paid or were properly deductible.
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