Did you receive a Form 1099-C in the mail from a creditor? You might be wondering what this form is and why it ended up in your mailbox. This is not surprising: most taxpayers don’t realize that canceled or forgiven debts count as IRS income—income that you may have to pay taxes on.
Creditors send Forms 1099-C to people after they have forgiven some or all of their debt. You must report the forgiven debt shown on this form for your federal income taxes.
Competition? Many 1099-C forms contain errors, and experts say this is one of the most confusing tax forms.
But there are a few rules, including an important one about timing: Creditors who file a Form 1099 with the IRS must send you a Form 1099-C by January 31st.
What is Form 1099-C?
At its most basic level, Form 1099-C reports debt that was canceled, forgiven, never paid back, or repaid as a result of bankruptcy. Here are a few reasons why you might have received a Form 1099-C:
- You made a deal with your credit card issuer and they agreed to take less than you owe.
- You have been forgiven for a student loan or part of a student loan.
- You have taken out a personal loan and your lender has forgiven some or all of that loan.
The IRS requires banks and other creditors that forgive debts of $600 or more to file Forms 1099-C because you must pay taxes on this so-called income (unless you qualify for an exemption).
Where does it tell me what debt caused me to get this form?
Look for the letter “identifiable event code” in column 6 of the form. It must match one of the eight codes (AH) listed in these IRS instructions, each with a short description.
Do I have to pay taxes on the amount on my Form 1099-C?
Not always. The IRS will also receive a copy of the tax form, so you will have to include it on your return, but there are a few exemptions and exceptions that can reduce the amount you owe or exempt you from taxes entirely. Here are the most common ones:
- You have filed for bankruptcy.
- Your debt was written off under the Paycheck Protection Program (PPP), which provided soft loans to businesses to help them survive during the COVID-19 pandemic.
- If your mortgage debt was forgiven before January 1, 2021, you may not have to pay taxes on it. Thanks to the Federal Appropriations Act, if you have debt forgiven up to $750,000 as a result of a foreclosure, short sale, act in lieu of foreclosure, or credit modification, you may not have to pay taxes on it (from -for the extension of the exclusion of the corresponding principal indebtedness at the place of residence until the 2025 tax year).
- You had a student loan that was canceled because you agreed to work for a set period of time in a specific profession, including a doctor or teacher assigned to a low-income area.
- If you have suffered a total and permanent disability and have had your student loan debt written off, depending on when your debt was paid off. If your student loan debt was written off after January 1, 2018, it will not be considered income and you will not have to pay taxes on it.
- You were “insolvent” at the time the debt was written off, which basically means you went broke. This is generally the best option for people dealing with paid off credit card debt.
If you qualify for an exemption, you must demonstrate this by completing Form 982 and including it on your tax returns.
I had financial difficulties when the debt was forgiven. Does this mean that I was insolvent?
The IRS requires you to add up the fair market value of everything you owned at the time and compare it to the total amount of money you owe. (You can use the bankruptcy sheet in IRS Publication 4681, but it may be better to work with a tax preparer.)
If you owed more than your assets were worth, then you were insolvent and you can deduct the amount of the insolvency from your taxable income.
Be aware that a declaration of insolvency may have future tax implications (you may have to reduce the base value of your home or your investment when it is sold), so be sure to ask your tax advisor about this.
Sean Fox, co-chair of Freedom Debt Relief in Phoenix, said most taxpayers who have debt forgiveness can prove themselves insolvent.
“If a taxpayer is in a verifiable state of financial difficulty, debt forgiven is not included in gross income,” Fox said. “The reality is that if the consumer were not insolvent, in many or most cases they would not have to resort to debt settlement at all.”
Does Form 1099-C mean my debt is canceled and can no longer be collected?
Receipt of a Form 1099-C should always mean that the debt is canceled and is no longer collectible. But it may be up to you to make sure.
Prior to 2016, IRS rules allowed creditors to file a Form 1099-C if there was no payment on a debt within 36 months. This resulted in many Form 1099-Cs being issued for debts that were past due but not actually forgiven. The IRS Taxpayer Protection Service called the resulting confusion in its annual reports to Congress a priority for the agency.
Under a November 2016 IRS rule change, creditors are no longer required to issue a Form 1099-C just because a debt has not been paid within 36 months.
If you received a Form 1099-C for a debt that you did not know was due, check with the creditor about the status of the debt. If they are following the old rule, ask them to revoke Form 1099-C per IRS Bulletin 2016-48, TD 9793.
Cancellation of Form 1099-C will alert the IRS that it was issued in error. If the creditor does not cancel the form or certify that the debt has been written off, you will need to use the IRS dispute process described in Publication 4681 to show that no taxes are due.
Why am I getting a 1099-C for old debt?
Unfortunately, creditors have a lot of wiggle room as to when to report forfeited income to the IRS. The statute of limitations varies by state and type of debt, but creditors are not required to file a Form 1099-C at that time, as they may continue to attempt debt collection indefinitely.
Consumer advocates argue that IRS guidelines require creditors to file a Form 1099-C three years after there has been no action on a debt, but they admit the rules are unclear. And many taxpayers receive 1099-Cs for debts that are years or even decades old.
If this happens to you, try calling the lender first.
“Sometimes when you go to a lender, it turns out it was a mistake and they issue a corrected one,” said Greg Fitzgerald, a debt attorney.
If it is not, you will need to include Form 1099-C on your tax return. A tax specialist can then help you evaluate your options.
You can either try to explain to the IRS why this should have been filed a long time ago and make it part of your tax return. Or it might be easier to just use one of the exceptions to avoid paying the amount.
However, the age of the debt can work against taxpayers, said Gary Bowd, CPA. The time of financial hardship that left the debt unpaid may have passed, with the result that the taxpayer’s ability to exclude debt from income due to insolvency has decreased.
Where can I enter information from Form 1099-C on the tax form?
On a standard 1040 individual tax return, enter information 1099-C on line 21 in the Other Income section. If you plan to use any exemptions, you will also need to attach Form 982.
Note that you cannot use the 1040EZ or 1040A short forms if you received a 1099-C form because they do not have a line to report the canceled debt.
What if my 1099-C has an error?
Unfortunately, mistakes are common. Often, the repayment date is wrong (some banks use the default date of December 31 for any canceled debt in a calendar year), Bode said, and it can be important to correct if you want to claim you were insolvent at the time. If it’s mortgage debt, it’s not uncommon for your home to be overpriced.
Start by asking the lender for an amended 1099-C. If your creditor won’t revise the form, ask your tax examiner to make adjustments to your tax return to correct the mistake, Bode said. You will need documentation, such as a letter showing that the debt was paid off on a different date, or a court record showing that your home was sold at auction for much less than what the bank said.
What if I had a debt that was canceled or forgiven last year, but I didn’t get my 1099-C?
Even if you didn’t get a Form 1099-C in the mail, not reporting forgiveness on your income tax return could result in an IRS bill or even a review, said Bruce McClary, a spokesman for the National Credit Fund. Consulting.
First, try contacting the financial institution that paid off the debt. If that doesn’t work, you can request a payroll and income statement for the tax year in question from the IRS. You can request it online or by calling 800-908-9946.
I signed the forgiven loan and each of us received a 1099-C for the full amount. Do we both have to pay taxes on this?
If you are married and filing a joint return anyway, it shouldn’t matter to your return. However, if you’re married and filing separately or signed a debt with someone who isn’t your spouse, things get a lot more complicated, said Jeffrey Pretsfelder, managing editor of Thomson Reuters Tax and Accounting.
In this case, state law will determine how you split the income and report it on your tax return.
According to Pretsfelder, some states assign it based on how much money you got from the loan. Others only look at each party’s ownership percentage, which is usually 50/50.
Additional factors may also come into play, such as any percentage deduction each of you took out of the debt, or if one of you took responsibility for the debt in the divorce agreement. That is why it is better to consult with a tax specialist in this case.
What happens to 1099-C after death? Are surviving spouses liable for any forgiven debt?
According to Logan Alleck, a chartered accountant and founder of Money Done Right, if someone’s debt is forgiven after their death and they were the sole party to that debt, their estate is responsible for any taxes due on the amount repaid, not their remaining debt. living spouse.
The estate must report this amount on Form 1041, a tax return used for estates and trusts, Alleck said. If the property does not meet the exceptions set out in the tax code, such as insolvency, income will be taxed.
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