Form 1099 C: Cancellation of Debt
Form 1099-C, Cancellation of Debt, is an IRS tax form used to report situations where a creditor forgives or cancels debt you owe. This typically happens when:
- You negotiate a settlement with a creditor to pay less than the full amount owed.
- Your debt goes into foreclosure and the lender repossesses the collateral (like a car or house) without recouping the full amount.
- A bankruptcy court discharges some or all of your debts.
Who Receives a 1099-C?
- You will receive a Form 1099-C from the creditor who forgave the debt if the amount forgiven is $600 or more.
- The IRS will also receive a copy of the form.
What Happens to the Forgiven Debt?
- Generally, the forgiven debt is considered taxable income and must be reported on your tax return for the year the cancellation occurred.
- This can increase your tax liability and potentially reduce your tax refund.
Exceptions to Reporting Forgiven Debt as Income
There are exceptions where the forgiven debt may not be taxable. These include:
A. Student loans: If your student loans are forgiven due to public service or disability discharge, the forgiven amount may not be taxable.
B. Insolvency: If you are insolvent (your debts are greater than your assets) at the time of the debt cancellation, you may be able to exclude some or all of the forgiven debt from your income.
C. Business debt: In some cases, forgiven business debt may be deductible.
What to Do with a 1099-C?
Review the information: Ensure the details on the form are accurate. Contact the creditor if you find any discrepancies.
Consult your tax professional: Understanding the tax implications of canceled debt can be complex. Discussing your specific situation with a tax professional is highly recommended. They can advise you on whether the canceled debt is taxable and how to report it correctly on your tax return.
Attach the form to your tax return: If the canceled debt is taxable, you will need to include the amount on the appropriate form when filing your taxes.