Sometimes a debtor could be overwhelmed by debt repayments and may need to negotiate for debt cancellation. If you get one, the IRS considers it an income, and it is taxable. That's where Form 1099-C comes in. You received a debt cancellation because you couldn't pay the debts, but the IRS still considers it an income taxed because it sees debt cancellation as income.
Form 1099-C is the cancellation of debts form that the IRS mandates to report various payments and transactions made to taxpayers by lenders and creditors. According to the law, if a debt of up to $600 was written off, you have to issue or receive the form. You will then have to report the amount on that form to the IRS as taxable income.
There may be some exceptions to the taxes before you get frustrated about the whole thing if you're forgiven some debts. However, you must be sure why the IRS classified canceled debt as income. When you borrow money, you are bound to pay it back, so no taxes are imposed. However, if you were forgiven part or whole of the debt, it is regarded as money you didn't work for, so taxes are due.
Debt forgiveness could also include the abandonment of secured property, foreclosure, repossession, etc. However, the 1099-C can be used for other purposes apart from debt cancellation. If a loan is modified or property is abandoned, or a student loan is canceled, the 1099-C may be used. Credit card debts may also count for the use of 1099-C.
When a lender forgives the debt, the debtor gets the form, although, as you would soon see, a copy also goes to Uncle Sam.
Aspects of 1099-C
There are three copies of the 1099-C. They are Copies A, B, and C. When a lender forgives any debt, copy A goes to the IRS, and copy C is also retained by the lender. Copy B stays with the debtor.
The form includes both the creditor and debtor details: their account numbers, tax identification numbers, and other important details.
As the beneficiary, you should go through the information on the form to be sure it is correct. Seven boxes must be filled accordingly. Part of the information which must be provided includes the date when the debt was forgiven, the exact amount that was written off, if there are any interests involved, and the reason for the debt cancellation.
If the information on the form you received is incorrect, you may have problems filling out your 1040.
Once you receive the form, it must be reflected in your income tax return under the "other income" line of your Form 1040. The IRS expects that you declare canceled debts in your form regardless of how much you were forgiven. Although only amounts beyond $600 can be taxable.
The creditor must send the 1099-C. You should make the reports in your income tax filings.
Are there exemptions?
It is not in every circumstance that your debt cancellation is taxable. Under certain conditions, the IRS may not tax the canceled debt. Those conditions include when the beneficiary declares bankruptcy or insolvency. Other conditions include death or permanent disability. If there are certain farm debts or needs for student loan forgiveness, you are also not liable to be taxed.
Also, up to $2 million of mortgage debt can be canceled by a lender if it involves a foreclosure.
FOR MORE INFORMATION ON HOW CORE PERFORMANCE CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.
THANKS FOR VISITING.
CORE PERFORMANCE