The Mortgage Forgiveness Debt Relief Act May Reduce your 2016 Tax Bill

The good news about debt forgiveness, in relation to the Mortgage Forgiveness Debt Relief Act of 2007, is that many taxpayers may qualify for a steep reduction on their tax liability.

Debt Cancellation May be Taxable

It works like this: If a mortgage lender cancels all or part of your debt during a specific tax year, that amount is automatically added to your gross income and you’re taxed on that income. Under the Mortgage Debt Relief Act, though, homeowners who have had any portion of his or her mortgage canceled in 2016 through a loan modification, there are policies in places that may excuse you from taxation on a portion of the absolved debt.

Here are 10 tips about debt cancellation:


If the canceled debt was a loan on the your principal home, the Mortgage Forgiveness Debt Relief Act excludes as income up to $2 million in absolved debt. This applies to most homeowners and also includes partial debt relief from mortgage restructuring and foreclosure.


If a taxpayer’s lender canceled or reduced part of their mortgage balance through a loan modification, or ‘workout,’ the taxpayer may be able to exclude that amount from their income — effectively lowering their tax bill in 2017. The Home Affordable Modification Program, or HAMP, is another way you may qualify for omitting canceled debt. The exclusion also applies to the amount of debt dismissed in a foreclosure.


Have you refinanced your home in 2016? If so, it’s another way you may qualify you for exclusion under the Mortgage Debt Relief Act. The exclusion is only applicable up to the principal balance from your original mortgage before refinancing. Note that the exclusion applies only if you used the proceeds from your refinancing to buy, build or substantially improve your primary residence.

If you used the proceeds for other purposes, don’t count on qualifying for the tax-reduction exclusion.


Under the Mortgage Forgiveness Debt Relief Act, other types of canceled debt, such as loan relief on a second home, rental and/or business property, credit card debt or car loans, do not qualify for this special exclusion. You can, however, look into different rules that may qualify these other types of canceled debts to be nontaxable or at least reduce your tax burden.

FORM 1099-C

If a lender reduced or canceled at least $600 of your debt, you will receive Form 1099-C, Cancellation of Debt, by February 1st. You’re required to file this form along with your federal tax return to show the amount of canceled debt, which will then be added to your gross income.

FORM 982

For taxpayers who qualify for the Mortgage Forgiveness Debt Relief Act, report your excluded debt on Form 982 — Reduction of Tax Attributes Due to Discharge of Indebtedness. This form is also filed with your income tax return.


Taxpayers can use the helpful Interactive Tax Assistant tool on to determine if debt canceled on a principal residence should be included as income on your federal tax return. The simple Q&A form, entitled “Do I Have Cancellation of Debt Income on My Personal Residence?” will help you determine if your forgiven mortgage debt is taxable.



The law that authorized the exclusion of cancelled debt from income was extended through December 31, 2016, which means if any portion of your mortgage debt was abated any time in 2016, you may qualify for a taxable income exclusion up to $2 million.


IRS e-file is fastest, safest and easiest way to file. Taxpayers can use IRS Free File to e-file their tax return for free. If you’ve earned $64,000 or less, you can use brand name tax software. The software does the math and completes the appropriate forms for you. If you earned more than $64,000, you can use Free File Fillable Forms. This option uses electronic versions of IRS paper forms. It’s best for those who typically do their own taxes. Free File is available only on

Be an Informed Taxpayer

If you’re doing your own taxes, it’s easy to overlook — or completely miss — useful IRS tax tips like the extension of the Mortgage Forgiveness Debt Relief Act. That’s why working with a professional CPA can save you money and also keep you out of unnecessary debt. Give Protax accountants a call today, at 212-714-9070, or email

Protax Consulting Services Seven Penn Plaza, Suite 416
New York, NY 10001
Tel 212.714.9070
Fax 212.714.6654

Member and Featured Faculty of:

American Institute of Certified Public Accountants

New York State Society of Certified Public Accountants

NYSSCPA’s 100%
Membership Program

Association of International Tax Consultants, U.S. Member

CCH Wolters Kluwer Faculty

Lawline Faculty

Furthered Faculty

Strafford Faculty

Clear Law Institute Faculty

Clear Law Institute Faculty

Contact Us for U.S.
International Individual Tax

wherever you are, .
wherever you go
- Download our FREE apps -

Download the Protax App on the App Store

Download the Protax App on Google Play

Member and Featured Faculty of:

  • American Institute of Certified Public Accountants
  • NYSSCPA’s 100% Membership Program
  • Association of International Tax Consultants, U.S. Member
  • Faculty
  • Faculty