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Debt Management

1099-C frequently asked questions

FAQ on 'Cancellation of Debt' tax form


Wonder why you received a 1099-C in the mail? Most taxpayers don’t realize forgiven debt is considered income, and questions abound

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Have you received a form 1099-C in the mail from a lender? You might be wondering what this form is and why it ended up in your mailbox. This isn’t surprising: Most taxpayers don’t realize that canceled or forgiven debts are considered income by the IRS – income you may have to pay taxes on.

That 1099-C reflects this: Lenders send these forms to people after they’ve forgiven some or all of their debt. It’s up to you to report the forgiven debt listed on this form on your federal income taxes.

The challenge? Many 1099-C forms contain errors, and experts say it’s one of the more confusing tax forms. (See related story: 1099-C surprise: IRS tax follows canceled debt.)

But there are some rules, including an important one on timing: Lenders that file a 1099 form with the IRS are required to send you a 1099-C form by Jan. 31.

See related: Best credit cards to pay your taxes

1099-C tax surprise

If a $600 or more debt is forgiven or canceled, the IRS requires the creditor to issue a 1099-C tax form to the borrower to show the amount of debt not paid. The IRS then requires the borrower to report that amount on a tax return as income, and it’s often an unpleasant surprise:

Fortunately, we have the answers to the most frequently asked questions about the 1099-C:

Q: What is a Form 1099-C?

At its most basic level, a 1099-C reports a debt that was canceled, forgiven, never paid back or wiped out in bankruptcy. Here are some reasons you may have gotten a form 1099-C:

  • You cut a deal with your credit card issuer and it agreed to accept less than you owed.
  • You had a student loan or part of a student loan forgiven.
  • You took out a personal loan and your lender forgave part or all of that loan

The IRS requires banks and other creditors who forgive debts of $600 or more to file 1099-C forms. Why? Because the IRS says you have to pay taxes on that so-called income unless you qualify for an exception.

Q: Where does it tell me what debt specifically caused me to get this form?

Look for an alphabetic “identifiable event code” in Box 6 on the form, says Gary Bode, a CPA in Wilmington, North Carolina, who specializes in canceled debt. It should match up with one of the eight reasons (A-H) listed in these IRS instructions, each with a short description.

Q: If I got a Form 1099-C, do I have to pay taxes on that amount?

Not always. The IRS will also get a copy of the tax form so you’ll have to include it on your return, but there are several exclusions and exceptions that can reduce the amount you owe or exempt you from paying taxes on it altogether. Here are the most common ones:

  • You filed for bankruptcy.
  • In a change for this tax filing season, the IRS told lenders not to send taxpayers 1099-C forms for the forgiveness of debt under the Paycheck Protection Program. The program often referred to as the PPP, provided forgivable loans to businesses to help them survive during the COVID-19 pandemic. Businesses that had these loans forgiven won’t be responsible for paying taxes on the debt that was eliminated.
  • Thanks to the federal government’s Consolidated Appropriations Act, which was signed into law on Dec. 27, 2020, taxpayers who’ve had mortgage debt forgiven might not have to pay taxes on it when filling out their 2020 income taxes this year.
  • That’s because the act extends the Qualified Principal Residence Indebtedness exclusion through the 2025 tax year. This means taxpayers who’ve had up to $750,000 in debt forgiven as part of a foreclosure, short sale, deed in lieu of foreclosure or loan modification might not have to pay taxes on it.
  • According to the new law, this exclusion will apply to mortgage debt forgiven before Jan. 1, 2021.
  • You had a student loan that was canceled because you agreed to work for a set time period in a certain profession, including a doctor or teacher assigned to a low-income area.
  • If you have suffered a total and permanent disability and had student loan debt forgiven because of this, you might not have to pay taxes. It depends on when your debt was discharged. According to IRS rules, if you received a total and permanent disability discharge of a student loan before Jan. 1, 2018, the amount of debt forgiven will be considered income and you’ll have to pay taxes on it. If your student loan debt was forgiven after Jan. 1, 2018, it wouldn’t be considered income and you won’t have to pay taxes on it.
  • You were “insolvent” at the time the debt was canceled, which basically means you were broke. This is typically the best option for people dealing with canceled credit card debt.

If you do qualify for an exclusion, you need to demonstrate it by filling out Form 982 and including it with your tax returns.

See related: How to file a 1099-C on behalf of a deceased spouse

Q: I was struggling financially when the debt was forgiven. Does that mean I was insolvent?

The IRS requires you to total up the fair market value of everything you owned at the time and compare it to the total amount of money that you owed. (You can use the insolvency worksheet in IRS Publication 4681, but it may be best to work with a tax preparer.)

If you owed more money than your assets were worth, then – congratulations! – you were insolvent, and you can subtract the amount of insolvency from your taxable income.

Keep in mind that declaring insolvency may have future tax consequences (you may have to reduce the basis of your home or your investments when you sell them), so make sure to ask your tax adviser about that.

Sean Fox, co-president of Freedom Debt Relief in Phoenix, said most taxpayers who have debts forgiven can prove they are insolvent.

“If the taxpayer is in a verifiable state of financial hardship, forgiven debt is not included in gross income,” Fox said. “The reality is, if a consumer was not insolvent, they, in many or most cases, would not have had to turn to debt settlement in the first place.”

Q: Does the 1099-C form mean my debt is canceled and can no longer be collected upon?

Receiving a 1099-C should always mean the debt is canceled and no longer subject to collection. But it may be up to you to make sure.

Until 2016, IRS rules allowed creditors to file a 1099-C if no payments had been made on a debt for 36 months. This resulted in many 1099-C forms being issued for debts that were delinquent but not actually forgiven. The IRS Taxpayer Advocate Service cited the resulting confusion in its annual reports to Congress as a priority for the agency to clear up.

Under an IRS rule change effective in November 2016, creditors are no longer expected to issue a 1099-C form merely because debt has gone 36 months without a payment.

If you receive a 1099-C for a debt you were not aware was discharged, clarify the status of the debt with the creditor. If they are following the old rule, request that they rescind the 1099-C under Internal Revenue Bulletin 2016-48, T.D. 9793.

Rescinding the 1099-C will alert the IRS that it was issued in error. If the creditor will not rescind the form or confirm the debt is forgiven, you will need to use the IRS dispute process outlined in publication 4681 to show that no taxes are owed.

Q: Why am I getting a 1099-C for old debt?

Unfortunately, creditors have a lot of wiggle room about when to report canceled income to the IRS. Statutes of limitations vary by state and by type of debt, but creditors are not required to file a 1099-C at that time since they can continue to try to collect on debt indefinitely.

Consumer advocates argue that under IRS guidelines, creditors should send a 1099-C three years after there has been no activity on the debt, but they acknowledge the rules are unclear. And plenty of taxpayers have been getting 1099-Cs for debt that’s many years – or even decades – old.

If this happens to you, first try calling the creditor. “Sometimes when you go to the creditor, it turns out it was a mistake and they will issue an amended one,” says Greg Fitzgerald, an attorney in Orange County, California, who specializes in debt.

If that’s not the case, you will need to include the 1099-C on your tax return. A tax professional can then help you evaluate your options.

You can either try to explain to the IRS why it should have been filed a long time ago and make that case as part of your tax return. Or it may be easier to simply use one of the exemptions to avoid paying the amount.

However, the age of the debt can work against taxpayers, Bode says. The time of financial hardship that caused the debt to go unpaid may have passed, leaving the taxpayer with a reduced ability to exclude the debt from income because of insolvency.

Q: Where do I enter the information from a 1099-C on a tax form?

Unfortunately, you can’t use the short forms 1040EZ or 1040A if you’ve received a 1099-C because they don’t have a line for reporting the canceled debt. On a standard 1040 individual tax return, list the 1099-C information on Line 21 under “Other Income.” If you are planning to take any exclusions, you will also need to attach Form 982.

Q: What if there is a mistake on my 1099-C?

Unfortunately, mistakes are common. Often, the discharge date is wrong (some banks use a default date of Dec. 31 for any canceled debt from the calendar year), Bode says, and that can be important to correct if you want to claim you were insolvent at the time. If it’s mortgage debt, it’s not unusual for the stated value of your home to be inflated.

Start by asking the creditor for a corrected 1099-C. If your lender won’t revise the form, ask your tax preparer to make an adjustment on your tax return to correct the error, Bode says. You’ll need documentation, such as a letter showing the debt was discharged on a different date or a court record that shows your house sold at auction for much less than the amount listed by the bank.

Q: What if I had a debt that was canceled or forgiven last year, but I didn’t get a 1099-C?

Even though you didn’t receive a 1099-C in the mail, failing to report the forgiven debt on your income tax return could result in a bill from the IRS or even an audit, says Bruce McClary, a spokesman for the National Foundation for Credit Counseling.

First, try contacting the financial institution that settled the debt. If that doesn’t work, you can request a wage and income transcript for the tax year in question from the IRS. You can request it online or by calling 800-908-9946.

Q: I co-signed on a forgiven loan, and we each received a 1099-C for the full amount. Do we both have to pay taxes on it?

If you’re married and filing a joint return anyway, it should make no difference on your return. However, if you’re married and file separately or co-signed on debt with someone who is not your spouse, it gets much more complicated, says Jeffrey Pretsfelder, managing editor for Thomson Reuters.

In that case, state law will determine how you split the income and report it on your tax returns.

Some states assign it based on how much cash from the loan you each received, Pretsfelder says. Others look only at the percent of ownership of each party, which is typically 50-50.

Additional factors can also come into play, such as any interest deduction you each took from the debt or if one of you assumed responsibility for the debt in a divorce agreement. That’s why, in this scenario, it’s best to consult with a tax professional.

Q: What happens to a 1099-C after death? Are former spouses responsible for any forgiven debt?

Logan Allec, a certified public accountant based in Santa Clarita, California, and owner of personal finance site Money Done Right, said that if someone’s debt is forgiven after they die, and they were the sole party to that debt, their estate is responsible for any taxes owed on the discharged amount, not their former spouse.

Allec said that the estate should report this amount on Form 1041, the tax return used for estates and trusts. If the estate does not meet the exceptions laid out by the tax code, such as being insolvent, the income will be taxable, Allec said.

However, in this case, the debtor’s widow should not report this forgiven debt on her individual tax form when filing taxes, Allec said. If the debt was in her husband’s name only, she is not responsible for paying taxes on it.

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