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Form 1099-C: Cancellation of Debt Income

November 12th, 2014 No comments

Taxpayers who have any type of debt cancellation or forgiveness will have to report that amount as taxable income.  The lender will file this form if there was more than $600 worth of cancelled debt for the tax year.  There are a few instances where this type of debt cancellation can occur, including:

 

  • A negotiated settlement of a debt that is for less than the original amount owed. This can occur frequently where debt negotiation is used as a substitute for bankruptcy.  However, the tax on the cancelled portion of the debt can be significant where debts are negotiated for a small percentage of the original loan.
  • Non-payment of a debt for at least 3 years and no collection attempts for 12 months. This seems to operate as a “passive cancellation” if the creditor has given up collection efforts.
  • A home in foreclosure there is a deficiency that the homeowner does not have to pay

 

The only way to avoid paying taxes on these amounts is if you can show that you are insolvent (debts exceed assets) or you have a mortgage forgiven that is covered by a legal exclusion.  Also, debts that are dissolved in bankruptcy don’t have to be claimed as income, and the creditor should not issue a 1099-C.

 

The form itself is fairly simple among the 1099 informational forms.  The left hand side of the form has boxes for both creditor and debtor information, including name, addresses and tax identification numbers.  The right hand side has the following boxes:

 

Box 1 :  Date of the identifiable event e.g. when the debt was cancelled.

 

Box 2 :  Amount of the cancelled debt

 

Box 3 :  If interest was included in the cancelled amount, then it would be listed here

 

Box 4 :  Description of the original debt such as credit card, mortgage, etc

 

Box 5 :  Contains a checkbox for the situation where the debtor was personally liable for repayment of the debt

 

Box 6 : The code for the identifiable event (reason the debt was cancelled such as debt relief, foreclosure, etc.)

 

Box 7 : Fair market value of property such as real estate to determine deficiency and calculate amounts forgiven.

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