Looking for more information about a 1099-c cancellation of debt notice? This guide has all the most important facts to help you know what to do.
Tax season can already be hard enough when you are trying to file all the right forms and make sure you are paying or being paid the right amount. When you get a 1099-c in the mail, you might even become more confused.
1099-C Cancellation of Debt Notice is given out from lenders when you have negotiated a debt cancellation with them. You receive this because the IRS makes you report any debt cancellations as taxable income.
You might be confused about why you received this form or what you're supposed to do with it. We will go over all the details in this article so you know how to use this form when filing your taxes. It will make the process much easier.
Form 1099 C Cancellation Of Debt
If you have debt that you can no longer afford or manage to pay off, you might have negotiated a debt cancellation with your lender. This might have helped you get by financially and helped you pay off some bills you had.
While this helps many Americans with debt and keeping afloat, many are surprised when the huge tax bill then comes in the mail during tax season. Anytime you receive a 1099-C, you have to report it as taxable income.
This seems unfair to many people since they might already be struggling financially. The IRS classifies any canceled debt as income, though. This is because it's viewed as a benefit without you needing to pay for anything.
When you borrow money from a lender, the money is not taxed because you are expected to pay it back. Since debt cancellation takes away this expectation, the IRS says you are basically getting to keep the money for free. So, now it's taxable income.
Where Does Form 1099-C Come From?
You will get the 1099-C form from the lender that forgave the debt. So, if you have had multiple debts forgiven in the same year, you will receive more than one 1099-C form since you will get one from each lender.
You can receive a 10-99 form for any type of debt that has been forgiven, but the most common ones include:
- Abandonment of property
- Modification of a loan
- Return of property to a lender
Make sure you include all forgiven debt from each 1099 form so that your taxes are done correctly with all the debt that was canceled. This can seem like tedious work, and you might not know where to put it on your tax forms.
This is why many people use professional tax services or online services to ensure that all the forms are included and done correctly.
Can Any Debt Be Excluded From The 1099-C Rule?
If you feel like you have heavy debt or other heavy financial burdens, you might be wondering if there are any exceptions to debt that is made taxable income. Unfortunately, there are not many exceptions, and almost all forgiven debt will come with 1099.
There are some special instances though, including the following:
Bankruptcy And Insolvency
Just because you have received a 1099 form does not mean all your options are gone. You might still be able to avoid being taxed in certain instances. One of the main exceptions comes with bankruptcy.
This applies if your debt was discharged in a Title 11 bankruptcy proceeding. This also applies to Chapter 7 and Chapter 13 cases. You will not be responsible for any taxes that come with this debt.
Your debt might also be excused if you can prove to the IRS that you were insolvent at the time that the debt was canceled. If you think you fall under one of these categories and you want to see if the taxes on the debt can be canceled, you might want to talk to an accountant or use an online tax service that asks you certain questions to see if you qualify.
Mortgage Forgiveness Debt Relief Act
The Mortgage Forgiveness Debt Relief Act was passed in 2007 after the major real estate market crash. With this act, you can relieve much of the debt that you might have accumulated, including up to 2 million dollars, if you're married and filing jointly. Other tax filing statuses can exclude up to 1 million dollars.
You can also exclude debt that was part of a mortgage restructuring or any mortgage debt that was connected to a foreclosure.
What's Included In A 1099-C?
Your 1099 might look confusing especially when you see all the different boxes and you aren't sure which one is which. Although there are many different boxes, here are the main ones to pay attention to and what they mean:
- Box 1: This is the date that the debt was discharged
- Box 2: This should show the amount of debt that was discharged. If it does not look correct, you need to contact the lender right away.
- Box 3: This shows the interest that is included in the debt that is listed in box 2. If box 2 is incorrect, then box 3 might also not be right.
- Box 4: This should have a description of the debt and a description of the property.
- Box 5: This will be checked or left blank. You should see a check if you were personally liable for the repayment of the debt.
- Box 6: This will show the reason that the creditor has filed the form.
- Box 7: This will usually only be filled out if there was a foreclosure or abandonment of the property that happened in the same year. It will show the fair market value. If this is the case, you will also receive a 1090-A form that might come at the same time or in the mail a few weeks later.
The above description should give you an idea of all the different parts of the form and why they are important.
How Do I Report Form 1099-C?
You will list the amount that is in Box 1 of the form under the Other Income line of Form 1040 or 1040-SR depending on which one you file. Keep in mind that lenders will only send you a 1099-C if they forgave $600 of debt or more.
Some people think if they had a debt forgiven that was less than $600, they do not have to report it since they did not receive a form. However, it's your responsibility to report all forgiven debt no matter the amount even if you did not receive a 1099-C.
Filing A 1099-C Form
When you receive your 1099-C form you will be able to use all the amounts listed in the boxes to report the information onto your tax report. This includes several different amounts including the principal, the interest, the fines, the late fees, and any administrative costs if applicable.
You only need to enter in the amounts, you don't have to actually file the 1099-C form with your tax return. It should still be kept though, for your own tax records in case you need to refer to it later.
The 1099-C form should be received by January 31, the year after the debt was forgiven or canceled. While most lenders will ensure the information is correct before sending out the form, it's always a good plan to double-check all the boxes. If you don't understand something or think there is something wrong, don't hesitate to reach out to the lender right away.
If you think you should have received a 1099-C but did not, you also need to reach out to the lender and ask them to send one. Keep in mind you might not receive a form if any of the following apply:
- Student loan forgiveness
- Public service loan forgiveness
- Non-recourse loans
- Certain farm debts
- Permanent disability or death of a student loan borrower
If you think you fall under one of the above categories and received a 1099-C, you might also want to reach out to the lender and make sure everything is correct.
As you can tell, receiving a 1099-C Form is serious because it means you need to report forgiven debt as taxable income. This might seem burdensome and confusing, but it's important to make sure all your debt is listed so that you don't risk getting audited.
Once you receive a 1099-C form, you can check all the boxes to make sure the amounts and information listed are correct. Don't be afraid to contact the lender if you think something looks off. You can report the forgiven debt amount as Other Income on your tax forms. This will ensure you are taxed for the right amount and will tell the IRS how much income total you are being taxed on.
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Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.