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

To determine how much of the Wrights' cancellation of debt income is subject to tax, one needs to consider the general tax principles surrounding cancellation of debt (COD) income. Under IRS rules, when a debt is canceled or forgiven, the amount that is discharged is considered taxable income. This means that the individuals must include the canceled amount in their taxable income unless they qualify for certain exceptions or exclusions.

In this context, if the correct answer indicates that $7,485 of the cancellation of debt income is subject to tax, it suggests that this amount reflects a calculation that considers any relevant exclusions or adjustments. For instance, exclusions might apply if the debt was discharged in bankruptcy, or if the taxpayer is insolvent—meaning their liabilities exceed their assets. If the Wrights did not qualify for any of these exclusions, then the full amount of the discharged debt would be taxable.

The choice of $7,485 likely represents the specific figure derived after carefully applying the rules regarding cancellation of debt income, considering any adjustments that would directly affect the amount subject to tax. This calculation might include details about the original debt, the amount forgiven, and their financial situation.

It's essential to understand these concepts, as they guide the determination of taxable income in situations involving debt