Final answer:
Taxpayers may need to include the amount of debt forgiven by a lender in their gross income under specific circumstances, such as loan modifications or bankruptcies. However, there are exceptions and exclusions that may apply to help taxpayers avoid including forgiven debt in their gross income.
Step-by-step explanation:
When a taxpayer has their debt forgiven by a lender, they may be required to include the amount of debt forgiven in their gross income under certain circumstances. One such circumstance is when the debt forgiven is a result of a loan modification or restructuring. For example, if a taxpayer had $10,000 of debt forgiven by a lender as part of a loan modification, they would generally need to include the $10,000 in their gross income.
Another circumstance where debt forgiven may be included in gross income is if the debt is discharged in a bankruptcy proceeding. In this case, the taxpayer may need to include the amount of debt discharged in their gross income, unless they meet certain exceptions.
It is important to note that there are certain exceptions and exclusions that may apply to the inclusion of debt forgiven in gross income, such as the insolvency exclusion and the qualified principal residence exclusion. These exceptions can help taxpayers avoid including the forgiven debt in their gross income under specific circumstances.