How to Avoid Getting Taxed for Phantom Income and Debt Forgiveness How to Avoid Getting Taxed for Phantom Income and Debt Forgiveness | Equifax Finance Blog

Finance Blog

Stay financially savvy with the Equifax Advisor.

Sign up for our FREE Monthly Email Newsletter


Thank you for signing up for the FREE Equifax monthly newsletter

In addition to keeping in the financial know, you may be interested in checking your credit score and report.

Understand your credit. Help protect your identity.

Equifax Complete™ Premier Plan

  • Know What May Influence Your Credit Score and Be Alerted of Changes
    Credit score monitoring with custom alerts
    Important Disclosure: The Equifax credit score and 3-Bureau credit scores are based on an Equifax credit score model and are not the same scores used by 3rd parties to assess your creditworthiness.¹
  • Help Protect Your Identity
    Automatic fraud alerts encourages lenders to take extra steps to verify your identity²
  • Lock Your Credit
    The ability to lock and unlock your Equifax Credit Report³
Save 75% your first 30 days with the purchase of Equifax Complete™ Premier

$4.95 for the first 30 days, then $19.95 per month thereafter. You may cancel at any time; however, we do not provide partial month refunds.4

¹The credit scores provided under the offers described here use the Equifax Credit Score, which is a proprietary credit model developed by Equifax. The Equifax Credit Score and 3-Bureau scores are each based on the Equifax Credit Score model, but calculated using the information in your Equifax, Experian and TransUnion credit files. The Equifax Credit Score is intended for your own educational use. It is also commercially available to third parties along with numerous other credit scores and models in the marketplace. Please keep in mind third parties are likely to use a different score when evaluating your creditworthiness. Also, third parties will take into consideration items other than your credit score or information found in your credit file, such as your income.

²The Automatic Fraud Alert feature is made available to consumers by Equifax Information Services LLC and fulfilled on its behalf by Equifax Consumer Services LLC.

³Equifax Credit Report Control™ is only available while you have a current subscription to Equifax Complete Premier. Locking your credit file with Equifax Credit Report Control will prevent access to your Equifax credit file by certain third parties, such as credit grantors or other companies and agencies. Credit Report Control will not prevent access to your credit file at any other credit reporting agency, and will not prevent access to your Equifax credit file by companies like Equifax Personal Solutions which provide you with access to your credit report or credit score or monitor your credit file; Federal, state and local government agencies; companies reviewing your application for employment; companies that have a current account or relationship with you, and collection agencies acting on behalf of those whom you owe; for fraud detection and prevention purposes; and companies that wish to make pre-approved offers of credit or insurance to you. To opt out of such pre-approved offers, visit

4We will require you to provide your payment information when you sign up and we will immediately charge your card $4.95. After that, we will charge the card $19.95 for each month you continue your subscription. You may cancel at any time; however, we do not provide partial month refunds.

Equifax® is a registered trademark and Equifax Complete™ Premier is a trademark of Equifax, Inc. © 2014, Equifax Inc., Atlanta, Georgia. All rights reserved.

How to Avoid Getting Taxed for Phantom Income and Debt Forgiveness

Written by Eva Rosenberg on June 22, 2011 in Tax  |   3 comments

How to Avoid Getting Taxed for Phantom Income and Debt Forgiveness By Eva Rosenberg, EA If you negotiate with a lender or credit card company to get your debt reduced, you walk away feeling lighter, happier, and calmer. Until the 1099-C arrives. Panic time! Not…

How to Avoid Getting Taxed for Phantom Income and Debt Forgiveness
By Eva Rosenberg, EA

If you negotiate with a lender or credit card company to get your debt reduced, you walk away feeling lighter, happier, and calmer.

Until the 1099-C arrives.

Panic time! Not only is cancelled debt taxable income, but it’s also generally taxed as ordinary income.

Except in cases when it’s not taxed at all:

1) Gift. When your loan is with a family member or friend, you may all agree to treat it as a gift. However, Wells Fargo, Chase, or Citibank is unlikely to gift you $25,000 or so just because you sit next to each other at Thanksgiving dinner.

2) Bankruptcy. If your debt was reduced or discharged at the same time as the 1.5 million nonbusiness bankruptcies in 2010 or 2011, there’s no income.

3) Insolvency. This is the exception most people overlook. If you’re insolvent the day before the lender waives your balance due, you can avoid paying tax on that 1099-C. The IRS considers you insolvent when your debts are higher than your assets.

4) Acquisition debt. For mortgages forgiven through 2012, the Mortgage Forgiveness Debt Relief Act of 2007 allows you to avoid paying tax on this particular debt cancellation. You are protected if the defaulted loan was the original debt on the property. Folks who refinanced and consolidated their debt, or pulled cash out of the new loan, are not protected. But you can try the insolvency route.

How to Convince the IRS You’re Insolvent

You can’t file this tax return electronically. You must provide an explanation. Include a worksheet showing your financial position before each lender cancelled a debt. List your assets (home, other property, used car, home furnishings, bank accounts, retirement accounts, etc.) in one column. List your debts in the next column. Include credit card debts, mortgages, personal loans (make sure you have them in writing), student loans, unpaid taxes, etc.

If the total of your asset column is higher than the total of your debt column, you’re not insolvent. You’ll owe the tax on all the 1099-C income.

However, if your debts are higher than your assets, you are insolvent up to the amount of the negative number. Suppose your cancelled debt is $15,000, and your insolvency computation results in $10,000 more debts than assets. You will pay tax on $5,000 worth of cancelled debts ($15,000 in debts, less the $10,000 insolvency). And if your debts are $20,000, then all of your cancelled debt will be tax-free.

Another Little Complication

That worksheet explains how you arrived at your insolvency computation. Next, use Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). The IRS insists you reduce any future tax benefits from the discharge to the extent that the discharged debt is not taxed.

The kinds of tax benefits you will reduce are things like passive loss carryovers, tax credit carryovers, capital loss carryovers, and contributions carryovers. If you have none of those, you may have to reduce the basis (tax cost) of any real estate you own.

Confused yet? Tax aspects of discharged debt get complicated, and it’s well worth consulting a tax professional. After all, if you’re going to avoid paying thousands of dollars in taxes on your loan forgiveness, don’t you want to also avoid potential tax problems?

Read More:

Skip the Allowance and Hire Your Child
Celebrity Tax Scandals
Temporary Work for Fun, Profit, and Retirement
How to Ensure You Get Audited
Medical Tax Deductions Are Worth More Than You Think

Eva Rosenberg, EA is the publisher of, where your tax questions are answered. Eva is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at


  1. Furious says:

    I would like to know if a lender can still file a 1099-c on a debt that is more than 10 years old. I have not heard from this lender in years then all of a sudden I get the tax form in the mail. Am I Legally obligated?

  2. Roseanne says:

    I ended up on disability due to a work related accident. My student loans were forgiven. They sent me a 1099. How can they expect me to pay this?

Leave a Comment

Name :

Commenting guidelines

We welcome your interest and participation on this forum, but be aware that comments will be published at Equifax's sole discretion. Please don't use this blog to submit questions or concerns about your Equifax credit report or raise customer service issues. Instead, you should contact Equifax directly for all such matters and any attempts to do so in this forum will be promptly re-directed.

Some other factors to consider when commenting:
  1. Registration and privacy. While no registration is required to visit our forum, participants wishing to post a message must register by creating an account. All personal information provided by forum members incident to registration is governed by our Terms of Use and Privacy Policy.
  2. All comments are anonymous. We'll delete your name, e-mail address, and any other identifying information, including details about your investments.
  3. We can't post or respond to every comment - As much as we'd like to, we can't post every comment, nor can we guarantee that we will respond to each individual message. All questions or comments about your Equifax credit report or similar customer service issues should be handled by contacting Equifax directly.
  4. Don't offer specific legal, tax or financial advice. All of the materials on this Site are for information, education, and noncommercial purposes only and this forum is not intended as a means of expressing views or ideas regarding any specific legal, tax, or investment advice. While offering general rules of thumb is both permitted and encouraged, recommending specific ideas or strategies regarding investments, taxes, and related matters is prohibited.
  5. Credit Repair. This blog is not intended as a venue for the discussion or exchange of ideas regarding credit repair or other strategies intended to assist visitors and community members improve or otherwise modify their credit histories, ratings or scores.
  6. Stay on topic. Your comment should be concise and pertain to the specific post in question.
  7. Be respectful of the community. The use of profanity, offensive language, spam, and personal attacks will not be tolerated and egregious or repeat offenders will be banned from future participation. We encourage disagreement and healthy debate, but please refrain from personal attacks on our WordPresss and contributors.
  8. Finally: Participation in this forum may be terminated by Equifax immediately and without notice for failure to comply with any guidelines or Terms of Use. As such, you should familiarize yourself with all pertinent requirements prior to submitting any response through the blog or otherwise. All opinions expressed in this forum are solely those of the individual submitting the comment, and don't necessarily represent the views of Equifax or its management.

Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.

Tax Archive