1099 C Cancellation of Debt - Understanding Tax on Forgiven Debts
How to Report Canceled Debt Taxable Income
If you owe a debt that was canceled by the lender, the IRS treats this as if the lender gave you the money to pay off the debt. The canceled debt, then, is essentially income for you, and must be reported on your tax return. To assist you in reporting your canceled debt, the lender is required to provide you with a Form 1099-C, "Cancellation of Debt," showing the canceled debt and any interest that was forgiven. This subject can get fairly technical, so you may want to consult with an accountant or tax attorney.
Figuring the Amount of Your Forgiven Debt as Income
Receive a 1099-C form from your creditor.If a creditor has forgiven or discharged a debt, then that creditor should send you a 1099-C tax form. This form reports the amount of the debt that was discharged. Receiving this form provides notice to you that the creditor has also reported that amount to the IRS.
Check the accuracy of the 1099-C.When you receive a 1099-C form, check it carefully. Make sure that the amount that is reported matches your records. If you believe the form is incorrect, contact the creditor who sent it to you. The creditor may need to make a correction and file an amendment with the IRS.
- If the creditor is continuing to try to collect from you, then the 1099-C form is premature. You need to contact the creditor to resolve this problem. In this situation, the creditor should either withdraw the 1099-C or give you a signed statement that makes clear that the debt is forgiven.
Report your forgiven debt even without a 1099-C.Tax law requires any government agency, lending institution or credit union to issue a 1099-C when forgiving any debt over 0. Reporting the forgiven debt with a 1099-C form is the creditor’s responsibility. However, even if the creditor neglects to report the forgiven amount, it is still your responsibility to report the forgiven or discharged amount as income. It will not be a valid defense to say that you did not receive a 1099-C.
- Before reporting that the debt has been canceled, you must confirm the cancellation is valid.
- If you need to know the actual amount of the forgiven debt, you should contact the creditor directly to verify.
- Note that private individuals are not included in the definition of creditors who are required to provide 1099-C reports. Nevertheless, if an acquaintance of yours canceled a debt that you owed him or her, you will most likely not receive a 1099-C. You still need to report that canceled debt as income.
- Note that a 1099-C is only required for canceled debts of 0 or more. However, this does not mean that you don’t have to report something less. If a bank canceled a debt of 0, you would not receive a 1099-C, but the amount is probably still income.
Identifying Exceptions to Reporting Forgiven Debt as Income
Do not report forgiven debt that was a gift.If the cancellation of a debt was intended to be a gift, then you do not have to report it as income. This definition of gift also includes an inheritance or bequest.
- There is no formal definition of "gift" for this purpose. If you owed a debt to your parents of, for example, ,000, and when your birthday came around they gave you a card that said, "Consider your debt paid off," this would pretty clearly be a "gift."
- Calling a cancellation a "gift" does not always make it one. Suppose you owed money to your employer, and he or she said you did not have to repay it, and the employer subsequently sent you a 1099-C form for the amount. You cannot unilaterally declare this to be a gift. Under the circumstances, this looks more like a canceled business debt, which is taxable.
- Many employers treat any payments to an employee (or cancellation of a financial obligation) as compensation on a W-2. For this reason, you need to be sure you are not double reporting a payment as both compensation and forgiveness of debt.
Do not report income for some forgiven college tuition debts.Some student loans can be forgiven in exchange for your working in a particular field after graduation, without creating reportable income. These loans must have been provided by your educational institution, a registered nonprofit organization, or by the government to be forgiven. The exception is that loans forgiven by an educational institution in exchange for services provided to that institution must be reported as income.
- For example, under the National Health Service Corps Loan Repayment Program, educational loans may be forgiven to graduates who provide health care in areas where there is a shortage of trained healthcare professionals. This would not be reportable income.
- As another example, if you agree to do work or provide services for your college or university, and in exchange the college forgives a portion of your tuition loan, this is considered income and must be reported.
Do not report income for forgiven debt that would have been deductible anyway.Some payments for professional services, such as accounting for tax preparation, can be deductible. If your accountant forgives some of the debt you owe him, you may not have to report the forgiven debt if you would have deducted the amount anyway.
Do not report income for a price reduction.Suppose you enter into an agreement to buy a home for 0,000, and you pay 0,000 up front. The seller agrees to let you pay the remaining 0,000 over time. Then (for whatever reason), the seller agrees to reduce the price of the house to 0,000. Your debt is reduced by ,000, but in this case the reduced debt is not income. It is just considered a retroactive change to the price of the house.
Excluding Some Forgiven Debts From Income
Report a bankruptcy discharge as an exclusion.If you filed bankruptcy and received a discharge of debts, the total amount of the discharged debt is considered income. You must report it as part of your tax return, but you will not have to pay taxes on it.
- You will need to get IRS Form 982 and check the box on Line 1a. You will report the amount of the discharged debt on Line 2. Attached Form 982 when you submit your tax return.
Exclude forgiven debts if you were insolvent at the time.The term insolvent in this case means that the total amount of your assets (house, car, bank accounts, property, all added together) is less than the total amount of your debts (mortgage, car payments, school loans, credit card bills, etc.). Subtracting these two totals will tell you the amount of your insolvency.
- For example, if your total assets add up to ,000, but you have debts of ,000, then your insolvency is ,000. For calculating insolvency, it does not matter if you are able to make your required monthly payments.
- You will need to get IRS Form 982 and check the box on Line 1b. On Line 2, report the amount of the canceled debt, or the amount of your insolvency, whichever is less.
Determine whether some canceled farm debt is excluded.If you make more than half of your living from farming, and you received a canceled debt, you may be able to exclude this from taxable income. The formula for calculating the allowable exclusion is fairly technical, so you should consult with an accountant to see if this will apply.
- To report an exclusion for canceled farm debt, you need to get IRS Form 982 and check the box on Line 1c. On Line 2, report the amount of the qualified canceled farm debt.
Report some canceled mortgage debts as exclusions.You may be allowed to exclude forgiven or canceled mortgage debts, if the mortgage was on property that you used as a business or as your principal residence, and the money from the loan was used to make improvements to the property. In this case, if the creditor canceled all or part of your mortgage loan, that amount is income that you can exclude.
- You will need to get IRS Form 982 and check the box on Line 1d if this was a business property. Check the box on Line 1e if it was for your residence. Report the allowable amount of the canceled debt exclusion on Line 2.
- Calculating the allowable exclusion in this category can be technical. You should speak with an accountant.
Report as income any canceled debt that is not an exception or exclusion.After you have considered all of the previous categories of exceptions or exclusions, any canceled debt that still remains must be reported as income.
Use IRS Form 1040 to report income.When you complete your tax return, you will report the amount of the forgiven debt on Form 1040, Line 21. This is the space for “Other Income.” On the blank line, you should write in the phrase “Forgiven Debt” and then report the amount.
- This report will be the amount of forgiven debt that you have not already decided is either an exception or an exclusion.
Report taxes on Form 1040-NR if you are filing your tax as a non-resident alien.You will still report the forgiven debt income on line 21 as “Other Income.” On the blank line, you should write in the phrase “Forgiven Debt” and then report the amount.
Attach Schedule C for business debts.If the canceled debt was related to business operations, you will report it on Schedule C instead of at Line 21 of Form 1040. You will report the canceled debt income on Line 6 of Schedule C. File Schedule C along with your Form 1040 or 1040-NR.
Use Schedule E if the canceled debt is related to rental property.As long as the rental property is not used for farming, you will use Schedule E. Report the canceled debt on Line 3 of Schedule E. File Schedule E along with your Form 1040 or 1040-NR.
Decide if you need Schedule F for canceled debt related to farm operations.If you are a farmer and the canceled debt is related to your farm operations, you will report it on Schedule F, line 8. File Schedule F along with your Form 1040 or 1040-NR.
- If the canceled debt is related to farming on a rental property, you will report the income on Form 4835, Line 6.
Do not use Form 1040-EZ to report canceled debt income.You are not eligible to use the shortened Form 1040-EZ if you have any income that is other than W-2 wages or simple interest. If you have a forgiven debt, you will need to use Form 1040.
Report your canceled debt as income if you use tax software.If you use a commercially available computer program to complete your taxes, such as TurboTax, TaxAct, or TaxSlayer (there are others), the program should ask you if you have any 1099-C income to report. A good program will ask you for enough details to determine if the canceled debt is an exception, an exclusion, or is reportable income. The program will then generate the appropriate forms.
- If you believe that you may have taxable income from a canceled debt, but your tax software does not seem to ask about it, you should contact the customer support service for your software program.
Getting Help with Your Tax Reporting
Use the IRS website.The official website of the Internal Revenue Service is . That site has links to a wide variety of information and publications that can help you.
- You can enter “ITA” in the search box at irs.gov to access the Interactive Tax Assistant. This is an interactive tool that will answer a wide variety of tax questions.
Contact the Taxpayer Advocate Service (TAS).The TAS is described as “your voice at the IRS.” You can call this service to help resolve conflicts or to ask questions that you may have.
- Call 877-777-4778 to find out if TAS can help you and to find an advocate near you.
Get help from the Volunteer Income Tax Assistance (VITA) Program.Some qualified people may be able to have volunteers at VITA prepare their tax returns. Generally, VITA is available for people who earn less than ,000 per year, disabled or elderly people, or people with limited English speaking abilities. To contact VITA and see if they can help you, go to IRS.gov and enter “VITA” in the search box. You can also call 800-906-9887 to find the VITA service that is nearest to you.
Use the Tax Counseling for the Elderly (TCE) program.The TCE actually offers free help for all taxpayers, but particularly for people over age 60. The TCE volunteers specialize in dealing with questions about pensions and retirement-related issues. To contact TCE, go to IRS.gov and enter “TCE” in the search box. You can also call 800-906-9887 to find the TCE service that is nearest to you.
QuestionLine 3 of Form 1099-C reports interest that is included in line 2. Can I deduct that from line 2 and report the difference on line 21, 1040?wikiHow ContributorCommunity AnswerForm 1099-C reports the interest separately that way because you need to determine whether the interest might be an exclusion or exception to income. If the interest would have been tax deductible if you paid it, then you do not need to pay tax on it, and you can subtract it as you suggest. However, if that interest would not qualify to be tax deductible, then you must report it as income on Line 21.Thanks!
QuestionI received a 1099-C that is a duplicate of something that I reported two years ago. Do I still have to file it now?wikiHow ContributorCommunity AnswerYou need to contact the creditor who sent you the 1099-C and figure out why you have this second one. Either the creditor has some additional debt in mind, or there is a mistake, or you misunderstood the amount of the canceled debt. Once you and the creditor resolve the misunderstanding, then either you will file the 1099-C (if it something new), or the creditor can contact the IRS and withdraw it (if it is his mistake).Thanks!
QuestionWhy am I getting a 1099-C if I paid the debt?wikiHow ContributorCommunity AnswerYou need to contact the creditor who sent you the 1099-C form. Either the creditor made a mistake or there is a misunderstanding between you and him/her about the amount of the debt.Thanks!
QuestionHow do I report canceled debt on Form 1040A?wikiHow ContributorCommunity AnswerIf you have canceled debt income to report, you cannot use Form 1040A. You must use the regular Form 1040 to file your taxes.Thanks!
QuestionCan the amount of cancelled debt be reduced by the amount you paid a debt management company to negotiate settlement?wikiHow ContributorCommunity AnswerIf the fee for that debt management company would have been otherwise deductible, then you could reduce the amount of your debt by that fee. However, I don't believe this is the case. You should check with an accountant.Thanks!
QuestionIf you file Form 982 for insolvency, can you use 1040-EZ for the remaining income?wikiHow ContributorCommunity AnswerNo. Form 1040-EZ is kept "easy" because additional forms and schedules are not included. You need to use Form 1040.Thanks!
QuestionOn line 21, do I add the cancellation amount to my wages and social security benefits?wikiHow ContributorCommunity AnswerYes. Line 21 is a catchall space for any 1099-C income. Just add them together and report the total.Thanks!
- For even more thorough information on this topic, you may want to read the IRS publication #4681, titled “Canceled Debts, Foreclosures, Repossessions and Abandonments (for individuals).” You can request a copy of this publication at IRS.gov/formspubs, or view it online.
- The terms exception and exclusion have technical differences for tax purposes, but to most people they mean the same thing. If something is an exception, that means that by its very definition it is not income, and you do not report it. An exclusion, on the other hand, is income, but it is income that, for some public policy reason, lawmakers agree you do not have to report. The result, for most people, is the same.
- If you fail to report a canceled debt, whether it generates a Form 1099-C or not, you could be penalized by the IRS. The IRS may also charge interest on the taxes you did not pay on the unreported income.
Video: CANCELLATION OF DEBT SECRETS || 1099-C HOW TO DEAL || MAKE MONEY ON TAXES
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