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What is IRS Form 1099-C?

Those who are liable for debt that has been forgiven are issued a Form 1099-C. This happens when a credit allows a debt to be settled in full for less than the amount owed. When a lender agrees to settle a debt, it sometimes reports the remainder to the IRS as forgiven debt. If the lender reports the forgiven debt to the IRS, the debt would have to be claimed on taxes as income. Form 1099-C covers many different kinds of forgiven debt including student loan forgiveness, interest accrued on a loan, credit card debt, car loans and others.

There are a number of reasons why a debt may be cancelled including the expiration of the statute of limitations, a debt settlement agreement, a policy of discontinuing collection by the lender, as well as other circumstances. Although it may seem unfair to tax forgiven debt, there is a logical explanation. When money is borrowed there are no taxes on it because a contract is signed to pay the money back. If the debt is forgiven then the IRS treats the forgiven debt as income, and subjects the forgiven debt to taxation.

In some cases a cancelled debt does not need to be reported as income, such as debt discharged in bankruptcy in a Chapter 7 or Chapter 13 case, student loans being forgiven (in some cases), and debt from a mortgage that was lost in a foreclosure, or short sale. Prior to 2007, forgiven mortgage debts were treated as taxable income, but the Mortgage Forgiveness Debt Relief Act changed that, and allowed mortgage debts forgiven between January 1, 2007 and the end of 2013 to not be subject to taxation. Up to $2 million of forgiven mortgage debt can be excluded for this period for those married and filing jointly, or up to $1 million for individuals and other filing statuses.

Tax liability can also be avoided if the individual was insolvent by at least the amount of the cancelled debt, at the time that it was cancelled. If this was the case, then Form 982 can be filed in order to qualify for the cancellation of tax liability due to insolvency. The cancellation of farm loans and real property business indebtedness may also qualify for reduced or no tax liability on the forgiven amount. State taxes vary depending on each state for the cancellation of debt, so a tax professional would need to be consulted regarding the various state laws.

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Erich J. Ruth

Erich J. Ruth provides technical support for National Software which is the parent company for 1099FIRE. 1099FIRE develops and markets a comprehensive range of products that enables any size of business or institution to effectively manage and comply with year-end filing requirements. 1099FIRE is an employee-owned company located in Phoenix, Arizona.

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