1099 C Cancellation of Debt Common Questions

1099 C Cancellation of Debt Common Questions

Disclaimer – We are not lawyers or tax professionals and we are not giving legal or tax advice. These are merely some options and information about taxes. 

Consult an attorney or tax professional in your area to determine all your options.

Debt forgiveness may come with a tax consequence. In other words, debt forgiveness is potentially taxable. If you are considering debt forgiveness like debt settlement, or have been through debt forgiveness, you need to understand the possible tax consequences of debt forgiveness.  In a previous blog post, we discussed the tax consequences of debt settlement. In this blog post, we will discuss the 1099-C form.

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What is a 1099-C tax form?

The 1099-C is an IRS form that is used to report “Other Income” from canceled or forgiven debt over $600.  A lender who cancels debt over $600 will generate a 1099-C and send it to both the IRS and you. In most circumstances, you will need to declare this other income on your taxes for the year.

This is commonly known as the debt forgiveness tax and is something you will need to consider before pursuing cancellation of debt.  

If you do not get a 1099-C but you have cancelled debt, you may still owe the forgiven amount. Always ask if the creditor will send you a 1099-C and make sure that the original creditor’s name is on the 1099-C. 

Exceptions or Exclusions to Claiming a 1099-C

Under certain circumstances, you don’t need to claim the 1099-C. We encourage you to talk to a knowledgeable tax professional before deciding that any of these exclusions include you. The IRS is not very forgiving about honest (or dishonest) mistakes.  

Bankruptcy cancels all debt forgiveness tax. Since bankruptcy has extreme financial considerations, it is not a suggested way to cancel your debt unless you are truly in a desperate situation.

We can explain your bankruptcy options for free!

Insolvency, often the precursor to bankruptcy, is a common situation for many people. Declaring insolvency may be an exceptional situation that will change your need to claim a 1099-C. Insolvency simply means that you owe more than your financial worth. In general insolvency arises from three situations: poor cash management; decrease cash income; or increased expenses. 

Insolvency proceedings are not declaring bankruptcy. You can work informally with creditors, or formally through the court system, to pay off debt, sometimes through selling assets. Creditors want to be paid and doing what you can to make payments is better than nothing in their eyes. 

Insolvency and working with creditors to pay off debt will most likely temporarily affect your credit rating. However, it will not have the long term effect that declaring bankruptcy does. The IRS has a specific definition for insolvency so if you are considering claiming insolvency you should know and understand the definition. A knowledgeable tax advisor is your best source of information. 

Certain student loan debt forgiveness may be excluded at the time of writing, however this is in flux.  Be aware that these may be eliminated in the 2021 budget currently proposed by President Trump. At present, these are the exclusions for student loan related debt forgiveness.

  1. The student loan holder dies or is totally and permanently disabled.
  2. Certain student loans with loan provisions that allow cancellation based on working a certain amount of time in a specific profession.
  3. Programs that forgive student debt for people providing health services in specific areas. 

If a loan is declared a gift, bequest, devise, or inheritance and is forgiven, the amount is not taxed.

Cash basis taxpayers – someone who reports income and deductions within the tax year, rather than waiting until April 15 for the following year – generally will not pay taxes on cancelled debt.

Mortgage debt forgiveness can occur when the seller gives a qualified purchase price reduction to the buyer. Pay-for-Performance Success Payments as defined under the Home Affordable Modification Program are also not taxable. 

Certain qualified farm or real property business indebtedness may also be excluded. 

For more details, check out IRS Publication 4681 (2018), Canceled Debts, Foreclosures, Repossessions, and Abandonments.

Again, make sure you consult your tax professional to find out all the facts!

I Qualify for Debt Forgiveness Exclusion!

If you check with a tax professional and you qualify, you get to fill out another form! The Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) or Form 982 will need to be filled out and attached to your IRS return. 

I Think I Qualified but I Paid my Taxes Already

If you discover that you have paid on an excluded forgiven debt, you can amend your taxes retroactively for up to three years. Of course, there is another form to fill out, the Form 1040X, and you will need to provide documentation. Mail all this to the IRS and you may receive a tax refund. 

If you are considering debt forgiveness, there is more to consider than just being debt free. The award winning account managers at Pacific Debt, Inc will be happy to help you understand debt forgiveness, the tax implications, and the effect on your credit.  They will explain which of the methods – credit counseling, debt consolidation, debt settlement, or even bankruptcy – are your best options.

Debt Forgiveness Calculator

Below are several debt forgiveness calculators or worksheets that may help you decide about debt forgiveness. 

Credit Card Interest Rate Calculator

Student loan debt forgiveness for those in certain professions

Insolvency worksheet

Debt repayment calculator

Debt settlement calculator

Questions to Ask Before Debt Forgiveness

Is debt forgiveness the best choice or should I pay my debts in full and avoid the tax consequences?

Will added income from debt cancellation change my tax bracket and thus make me pay more in taxes?

Disclaimer – We are not lawyers or tax professionals and we are not giving legal or tax advice. These are merely some options and information about taxes. 

Consult an attorney or tax professional in your area to determine all your options.

Pacific Debt, Inc

Pacific Debt Inc is one of the leading debt settlement companies. We have consistently been named one of the best debt settlement companies in the US for years. This year, we earned two #1 rankings for our customer service. Our account managers help you understand your options and whether or not debt settlement is your best option. If it is not, we will refer you to a trusted partner more appropriate for your situation.

For more information on debt settlement or if you have more than $10,000 in credit card debt that you can’t repay, contact Pacific Debt, Inc. We may be able to help you become debt free in 2 to 4 years. We have settled over $300 million in debt for our customers since 2002.

Once you’ve completed our debt settlement program, your financial situation should start to improve. You’ll be able to use money you once used for debt, and be able to use it for  saving, investing, retirement, etc.Pacific Debt, Inc is accredited with the American Fair Credit Council and is an A+ member of the Better Business Bureau. We rate very highly in Top Consumer Reviews, Top Ten Reviews, Consumers Advocate, Consumer Affairs, Trust Pilot, and US News and World Report.

Pacific Debt is currently providing debt relief coverage in the following states:
Alabama, Alaska, Arizona, Arkansas, California, Colorado, District of Columbia, Florida, Idaho, Indiana, Kentucky, Louisiana, Massachusetts, Maryland, Michigan, Minnesota, Missouri, Mississippi, Montana, North Carolina, Nebraska, New Mexico, New York, Oklahoma, Pennsylvania, South Dakota, Texas, Utah, Virginia, Wisconsin
* Other states can be connected to one of our trusted partners

For more information, contact one of our debt specialists today. The initial consultation is free, and our debt experts will explain to you all your options.

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