It is quite likely that you have many tax forms from banks, employers, lenders, stockbrokers and others sitting on your desk. For many of you, these tax forms will most likely be ultimately handled by tax professionals. There are some of you who may input the info on these forms into a certain software for tax preparation. Regardless of how you intend to handle your taxes this year, the chances of you knowing exactly what every number, letter and information on these tax forms actually mean are quite small. However, this is going to change. After reading the information below, you will have a much better understanding on this subject and you will be able to make sense of these tax forms.
What you need to know about 1099 c Cancellation of debt
1099-c cancellation of debt is a tax form issued by the creditor when a debt is discharged for an amount that is less than the full amount that you owe after a detectable event and that amount exceeds $600. This detectable event is normally determined by the creditor and usually occurs in cases where the creditor does not think that you are going to be able to pay the full amount that you owe or in cases where the creditor is not able to collect the amount that is owed to him. However, this can quite possibly be a result of a repression, foreclosure, abandonment of property, a voluntary transfer of property to the loan lending company, or it could also be a mortgage modification.
If you have a 1099-c cancellation of debt for an amount that is less than what you owe, the sum of that canceled debt will be considered as income and may be taxable. We use ‘it may be’ as there are some exclusions and exceptions to that rule.
Even in cases you manage to qualify for an exclusion or an exception, you may still get a form 1099-c cancellation of debt. That is simply because the creditor does not really know whether you are going to have an exclusion or an exception. What they are obligated to do is to simply report all the details. That includes the amount of debt of cancellation and the cancellation of debt. However, in case the person who is issuing the 1099-c form does have a reason to know that the debt’s discharge would not be reportable (for instance, if there is a bankruptcy or if it are some gifts between the related parties), in that case then, the 1099-c form must not be used.
What should you do if you receive a 1099-c form
- First of all – do not panic
- Second, you probably not want to ignore it either
If you do get a 1099-c form, you will need to include that form as part of all your tax returns for the specific year that your debt has been discharged or forgiven. In case you fail to include the 1099-c form, you will only slow down the process and you will most likely receive an IRS notice stating that you owe certain taxes on your debt that has been forgiven. It is also possible that there may be some penalties for you being late.
Some steps to take in case you get a 1099-c form:
Make sure you verify the amount in Box 2 (that is the amount of discharged debt). You really want to be sure that it is absolutely accurate.
As mentioned before, this will only reflect the discharged debt amount, not the amount that you have actually paid. So in case you had $80,000 in student loans, but you got $20,000 of those $80,000 forgiven, the amount that will be reflected in Box 2 is going to be $20,000. In case there are any errors with your 1099-c form, you need to contact the creditor to get the revised version.
Contact a tax professional
Any debt that you get discharged or forgiven will ultimately result in a taxable income increase. The overall amount of your tax bill can potentially vary quite widely depending on several different factors, these include:
- The amount of debt that you had forgiven
- The place where you live
- What your tax bracket at the moment is
You need to file your tax return
When you receive a 1099-c form, you will have to include the amount that has been discharged on your federal tax return. You need to report any of your canceled debts of form 1040, line 21 (according to the IRS).
You need to take care of your tax bill
Once you have a clear idea on how much you may owe, you should make sure that you take care of your tax bill. If you are not able to afford to pay for your tax bill, you may be able to sign up with the IRS for a repayment plan. However, there may be some additional interest and penalties.
Additional information regarding 1099-c cancellation of debt form that you may want to know
Receiving a 1099-c form in your mail can really be a bit of a stressful experience. You must, however, report any forgiven debt that you may have even if you have not received a 1099-c form.
Now, in case you ever qualify for a student loan debt forgiveness from a plan that is income-driven or a disability discharge, you still will have to report all the forgiven amount in your taxes. There is only a single exception to this, and that is in case that you have received a student loan debt forgiveness through a certain loan forgiveness program such as Public Service Loan forgiveness or some other program that is related to your profession. It may not seem like a good thing to be forced to pay taxes on a loan that you most likely could not afford, to begin with, hence the discharge or the forgiveness. However, this is the way that the law is currently set up. The reason behind it is, that in case you took out a loan, you are expected, from a legal point, to pay back that loan.
If you manage to get help via forgiveness, then you will be paying taxes on the amount that has been forgiven. If that law did not exist, there would not be anything to prevent people from taking out a number of loans and getting forgiveness for each one and they would be doing it without any real consequences.
1099-c cancellation of debt exceptions that do not lead to an increase in taxable income
Even though 1099-c form cancellation of debt normally leads to a taxable income increase, there are still several exceptions that you may want to know about.
Even though in many cases, a forgiven debt is considered as an income, there are still some exceptions to that rule. These exceptions include:
- And an amount that has been canceled as a gift
You may be able to prove that at the time of the debt cancellation that you are insolvent. Normally, in a time of debt cancellation you are insolvent in case your amount of debt surpasses your assets. According to the Internal Revenue Service, you should not include a dent cancellation in income in the situation where you were insolvent right after the debt cancellation. That means that if you really think that before you have received your loan forgiveness you have been insolvent, you do not need to include the forgiven debts in the tax return.
In case you really could in no way afford to repay your debt, you may be eligible for an exclusion and be free from paying taxes on your forgiven debts.
There are many people, for whom to receive a 1099-c form may come as a bit of a surprise. In case you have your student loans discharged or forgiven due to disability, or are going to be forgiven in the future, do not forget to report the overall amount of your tax return for the year of the debt forgiveness, regardless of whether you get a 1099-c form or not.
In case the amount of your debts (liabilities) surpass your assets, you may want to prove that you are in fact insolvent and are not able to pay taxes on the debts that have been forgiven. Of course, this subject has lots of other details, and it is not really possible to get all the information that you need in some situations from this article. So in case you have any other questions regarding 1099-c form, cancellation of debt, it is better that you contact a professional tax specialist to get more help