How much of the Wrights' cancellation of debt income is subject to tax?

Cancellation of debt (COD) income refers to the amount that a taxpayer no longer has to repay to a lender, which generally must be included in gross income for tax purposes. When determining how much of the Wrights’ cancellation of debt income is subject to tax, we assess the total amount of the debt discharged.

In this scenario, if the cancellation amount of $7,000 is clearly recognized as income due to the cancellation of debt, it becomes part of the taxpayers' gross income unless they qualify for an exclusion. Common exclusions include those related to insolvency, bankruptcy, or qualified principal residence indebtedness, but in this case, it appears that no such exemptions apply.

Therefore, if the Wrights have incurred COD income that totals $7,000 and no special exclusions apply to lessen this amount, the entirety of that figure would be subject to tax. Consequently, the correct answer—indicating that the amount subject to tax is the full $7,000—reflects the standard treatment of such income under tax regulations.