I have filed my taxes for 2012, and I just received a 1099-C for a debt from GMAC that was cancelled last year. This was from a vehicle that was repossessed in 2010. The original payoff was $5410 (the difference between the loan I financed and the amount the vehicle was auctioned for), of which $3246 was cancelled after I paid the difference to GMAC ($2164).

My question is this: How is this considered income when I never actually had any of that money and I do not own the property? This is not like a credit card pay-off, where the money has already been spent!!

I am expected to include this in my Gross Income for the year? It seems like I am being double-taxed here.

PLEASE HELP!

It is IMPUTED INCOME, because it was a debit you were legally liable for and would eventually have paid, but for which your debt was forgiven. If you do not have to pay a bill, that is money in your pocket in the eyes of the IRS.

From IRS Tax Topic 140:
When you borrow money, you are not required to include the loan proceeds in gross income because you have an obligation to repay the lender later. If that obligation is subsequently canceled, you may be required to include the amount of the canceled debt in gross income. A commercial lender canceling a debt will issue a Form 1099-C , Cancellation of Debt, to report the cancellation.
Check if box in 5 is checked or not. If not, then this is not an income.

I am insolvent. My liabilities far outweigh my assets. Yay