What are tax attributes?

Tax attributes refer to specific financial elements that can impact a taxpayer's tax obligations, including basis in assets, various types of tax credits, and carryovers that may be used to offset income in future tax years. When a taxpayer has debt discharged, it often results in a reduction of these tax attributes, which must be accounted for in tax calculations. The concept stems from the fact that the cancellation of debt can create taxable income, but to balance this, the law allows for the reduction of certain tax attributes that the taxpayer may otherwise benefit from.

This means that the basis of certain assets may be decreased to reflect the tax implications of canceled debt, tax credits may need to adjust based on the change in income levels due to discharged debt, and other similar transactions must also adapt in response to changes in financial status. This understanding of tax attributes is crucial for tax planning and compliance, particularly in scenarios involving debt cancellation.