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Tax Payer had a forclosure in 2014 and received a 1099-C for each taxpayer and spouse. So now they have a gigantic tax bill.

Does the IRS expect them to pay this excess tax when they could not pay the mortgage? Is there not some tax relief in this situation?
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John Stancil
If the house was your primary residence that you owned and lived in for 24 of the previous 60 months, you may qualify for an exclusion of the cancelled debt. Also, if you are insolvent at the time of the debt cancellation, you do not have taxable debt cancellation income to the extent of your insolvency. For example, if you assets totaled $100,000 and your debts were $150,000, you are insolvent to the extent of $50,000 and that amount can be excluded from tax.

Barring any exception, you have borrowed money and not repaid it, the IRS says that's taxable income. But you aren't paying back dollar for dollar. If you are in the 25% bracket you are only being taxed 25 cents for each $1 of cancelled debt.
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