In these troubled economic times, many financially distressed borrowers have had some or all of their debt cancelled or forgiven by their lender last year. While that was no doubt welcome relief to the people who received it, they may not have realized that the amount of the forgiven debt may have to be included in income.

However, not all canceled debts trigger taxable income. And, even if there is no exception or exclusion in a particular case, the tax bite may be reduced or eliminated if you can show that the amount reported by the lender is incorrect.

The tax laws specifically include income from the discharge of indebtedness in gross income. However, there are several exceptions to this rule and numerous exclusions from gross income for certain types of forgiven debts.

If the cancellation of debt is by a private lender, such as a relative or friend, and is intended as a gift, there is no income. Likewise, a debt cancelled by a private lender's Last Will and Testament triggers no income to the borrower.

There is also an exception for certain student loans. For example, doctors, nurses and teachers who agree to serve in rural or low-income areas in exchange for cancellation of their student loans won't have income from the cancellation if they meet certain conditions.

Also keep in mind that there is no income from cancellation of a debt that was deductible. For example, if a lender cancels home-mortgage interest that could have been claimed as an itemized deduction on Schedule A of Form 1040, there is no tax problem to contend with.