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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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Categories: 1099 Forms Tags: ,

Why Did I Get a 1099-C and What Do I Do With It?

June 5th, 2014 No comments

As of April 2014, American households owed $11.68 trillion in debt, which is up 3.7% from last year.

With so many jobs lost and so many people having to take lower paying jobs, there is often not enough money in a household budget to pay these debts. Sure, a household can declare bankruptcy, but that might be overkill, if there are only a couple of accounts that the family is past due on.

Enter the collection agents. They call you, and call you, and call you. You make payment agreements, you pay them some money, but the fees and the interest charges keep ballooning the amount due.  Finally, someone offers you a deal: You pay us $3000 and we’ll forgive the remaining $7000.

You scrounge around and come up with the money, glad to be off the hook for the debt, glad to not be getting the day and night phone calls. Relief!

Then January comes and you get this form in the mail, this 1099-C. You have no idea what it is or why you have it or what you’re supposed to do with it.

Well, guess what. The collection agent never told you this, but the amount of debt that was forgiven, the $7000, has now been declared income to you. The thinking is that you benefitted by that amount, and you shouldn’t get that for free. So, the amount that was forgiven now has to be added to your tax return as income and you have to pay taxes on it.

Here’s the trick, when you get one of these. It is called form 982, Reduction of Tax Attributes Due To Discharge of Indebtedness. Don’t let the name of the form scare you. What you really want is the worksheet that goes with the form.

This worksheet has two sections: assets and debts. There is a date on the 1099C, which is the date the original debt was cancelled. As of the day before that date, you list the values of what you owned and the amounts you owed (including the debt that would be cancelled the next day.) You’ll have to estimate some things, like the values of your furniture and books and jewelry. Just do the best you can. Other things, like the value of your cars, you can look up online. You can also look up how much money was in your bank accounts that day and how much you owed on other credit cards or your mortgage.

When everything is laid out on the form, you subtract the total value of your assets from your total debt. If the amount that remains is debt, and it is more than $7000, then your financial situation as of the date of cancellation was that you were insolvent, even if you were not in bankruptcy. That means you don’t owe any taxes on the $7000 that was cancelled. Pretty neat, huh?

So, you enter the amount of your insolvency on the 982 and include it with your tax return. Voila! Off the hook again!!

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What is IRS Form 1099-C?

June 7th, 2013 No comments

IRS Form 1099-C is used by creditors (such as the federal government, banks or other financial institutions, credit card companies, or credit unions) to report debts that are cancelled to debtors that exceed $600.

The debtor is required to include this amount as income. If the debtor had a debt written off and did not receive a 1099-C form, it is likely that the form was still reported to the IRS, and the creditor should be notified.

Not every type of forgiven debt is considered to be taxable by the IRS.  Although a 1099-C form is still required to be submitted to the IRS by creditors for all debts written off that exceed $600, the debtor in some situations is not required to report the cancelled debt as income.

For example, the Mortgage Forgiveness Debt Relief Act of 2007 allows certain exemptions for reporting forgiven debt relating to foreclosed homes.  If the cancelled debt was intended to be a gift, the debtor is not required to report it as income.  Any debt that was discharged in a Chapter 11 bankruptcy would be excluded from reporting requirements.  If you are insolvent, or if your debts exceed the value of your assets before the creditor agreed to write off your debt, you are not required to report that cancelled debt as income on your tax return.

1099-C forms are required to be submitted to the debtor by January 31.  The deadline for paper filing to the IRS is typically the end of February.  If you decide to efile, you have an additional month to submit the data; the deadline for efiling is typing the end of March.  You can request an 30-day extension online taking the due date to the end of April.

1099-C software at 1099fire.com creates original, replacement and corrected files in the format required by the IRS for electronic transmission. The system is updated each year to reflect the format changes that are made by the IRS.

You can file electronically whether you have just one information return or millions.  The IRS encourages everyone to file electronically and requires businesses with more than 250 information returns to electronically file.

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How to complete IRS Form 1099-C

June 4th, 2013 No comments

IRS Form 1099-C is used to report Cancellation of Debt.  Lenders use Form 1099-C to report to the borrower and the IRS that a debt of $600 or more has been canceled or forgiven.

Form 1099-C is an important form for the debtor.  If a creditor has discharged a debt owed by the borrower, then the borrower is required to include the forgiven debt on the “Other income” line of their 1040 form, even if the amount is less than $600.

The top part of Form 1099-C asks for the creditor name, address and then TIN.  This is followed by the debtor name, address and TIN.

There are 7 boxes on Form 1099-C.  Each box is discussed below:

Account number.  This is just a unique number the creditor uses to distinquish the borrower.

Box 1. Shows the date of the identifiable event.

When I think of the words “identifiable event”, I say to myself “what started it all”.  The borrower might have filed bankruptcy, was foreclosed on or the debt reached a statue of limitations on a certain date.  Box 1 shows the date the earliest identifiable event occurred or the date of an actual discharge.

Box 2. Shows the amount of debt discharged.  This is an important box for the borrower because it is the amount the borrower is required to show on their 1040 and will be treated as income.  If the borrower disagrees with this amount, then they should contact the creditor.

Box 3. Shows the interest if included in Box 2.

Box 4. Shows a description of the debt or property.

Box 5. Shows whether the borrower was personally liable for repayment of the debt when the debt was created or at the time of the last modification.

Box 6. Shows the identifiable event code. The codes are: A – Bankruptcy; B – Other judicial debt relief; C – Statute of limitations or expiration of deficiency period; D – Foreclosure election; E – Debt relief from probate or similar proceeding; F – By agreement; G – Decision or policy to discontinue collection; H – Expiration of nonpayment testing period; or I – Other actual discharge before identifiable event.

Box 7. Shows the fair market value of the property.

Copy B of IRS Form 1099-C is sent to the borrower by the end of January.  Copy A of Form 1099-C must be paper filed along with Form 1096 by the end of February or the creditor can electronically file Copy A by the end of March. Copy C is retained by the creditor for their records.

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